TJP

Shameful, British Petroleum (BP) had no viable contingency plan in the event of a blowout. However, BP is not alone. Projects, particularly those that have the potential to cause environmental disasters, should be authorized only if a robust feasibility study is performed and reviewed by experts.  The feasibility study should include all known potential safety and environmental hazards and remedies to mitigate identified hazards.

One of the main sources of market failure occurs when consumption or production decisions of one agent affect the consumption or production opportunities of others directly, instead of through the pricing system. Thus, BP’s decision to drill in the Gulf of Mexico did not include the full cost of drilling, since potential harmful externalities were not included in the project cost.

Economists, such as Layard and Walters, note that the price system is only efficient in allocating resources when prices measure the marginal opportunity costs. However, if the full cost of a project, such as BP’s Deep Water Drilling in the Gulf of Mexico is not fully debited; the non debited costs are often imposed on others, such as the surrounding communities.

It appears that the bulk of the costs of the crude oil disaster in the Gulf will be imposed on the nearby coastal communities. Thus, like the Exxon Valdez disaster spill, the social costs borne by coastal dwellers and the environment deviate from the private costs incurred by the big oil companies.

This cost shifting occurs because society, represented by government officials, often fails to regulate large business donors. According to Layard and Walters the problem of externality results from jointness and lack of institutions that could ensure that individuals and businesses pay for the full cost of their actions.

One way to deal with negative externalities is regulatory fees and taxation to cover the potential negative effects on the rents of residents that the externality is bound to cause. For instance, in the case of the BP’s spill in the Gulf of Mexico, the fishing, tourism, and other industries might lose income for years to come.

Some of the fees and taxes imposed on the potential polluter could be held in escrow and returned upon safe completion of the project. This will provide an incentive for potential polluter to maximize safety and provide appropriate contingencies in the case abnormal events. For instance, BP apparently had no incentive to incur contingency costs for a blowouts or the malfunction of the blowout preventer.

Surely, it is inappropriate to take the position that given the disaster no additional drilling should occur. Such a position would be tantamount to saying that given an airline disaster no more airline flying should occur.

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