Environmental Citizen Suits with Pigovian Punitive Damages

Federal environmental laws encourage private citizens to act like "private attorney generals" and to sue a firm. This citizen group competes over the rewards of levels of regulation and enforcement. The firm can reduce its output to curtail the likelihood of losing the contest. This paper explores whether one can combine citizen suits with Pigovian punitive damages to equate private and social incentives. We show: (i) without punitive damages, the level of output of the firm is only optimal in a special case; (ii) with punitive damages given to the citizen group, Pigovian punitive damages can be found, but it could be negative—the citizen group might have to compensate the firm; (iii) the ideal level of punitive damages can be achieved if a government takes it; and (iv) punitive damages which are taken by the citizen group induces more effort expended in the conflict relative to when the government receives the punitive damages.