Saturday, May 22, 2010

Clean up costs and lost value

OK, so it seems fairly obvious that the economics of the recent oil spill can be explained using externality theory. A market creates a cost realized by a third party, and that cost is not reflected in the market price of the good. As such, the market outcome is inefficient in the sense that total net gains to society are not maximized.

My last post was an attempt to get you to think about how a single, accidental imposition of costs onto a third party might be different than a continuous release of pollution from production or consumption, and to consider how Pigouvian taxation may or may not apply in cases of a "one time" release of pollution. To get you to think about it a bit more, here's a follow-up question:

How much should responsible the responsible party pay in these situations?

For context, check out this short article from CNN Money on the clean-up costs associated with six big oil spills.

Background reading:

CERCLA and Superfund from the US EPA

The Oil Spill Liability Trust Fund from the US Coast Guard


Jennifer said...

Cost recoveries equal to clean up and damage penalties that reflect both local and global ecological damages.

A per barrel tax revenue deposited in the Oil Spill Liability trust fund seems appropriate. Is the 5% per barrel a well formulated figure? Does it include current damage assessment?

I am confused by the statutory limit and the tax suspension. Why is there a revenue limit? Why were oil companies relieved of paying the damage preventative tax? Couldn't the monies have gone to another account for example CERCLA? Or couldn't overages be used to improve oil drilling safety and other environmental protection technology?

Wanda Lewis said...

I believe that the cap should be removed completely. If the responsible parties are forced to pay for all of the damage they create, people will have no option but to look into new technologies and ways to prevent these type of disasters.

Chad Clark said...

The oil companies should be held fully responsible for clean up. BP should have spent the money and taken the proper precautions to prevent this from happening.

Joel Garner said...

I believe in terms of compensation the company should be accountable up unto a certain level lets say 75% or some number of the company's value. If huge problems are incurred from someone tapping into our resources they must pay for a trageic end it's their responsibility to do so. The tax payers should not be left with the burden of having to pay for events caused which are out of their hands. If the company at some point turns down the cleanup efforts or abandons the job of course our government should step in. This however is not a natural disaster and i just feel the party profiting from the venture should be responsible for clean up at any cost for any situation.

Dr. Peter Schuhmann said...

Good stuff everyone, but let's remember... there are two sides to a market. Placing blame and responsibility completely on the supplier is incorrect. BP would not have created this disaster if we didn't want to purchase their gas (and purchase it at a low price).

I hinted about this in our discussion of Hardin (YOU are the herdsmen). Doesn't the "taxpayer" bear some responsibility here? Wasn't it the taxpayer who vehemently objected to higher gas taxes and isn't it that same taxpayer who is currently railing against cap-and-trade? People want the solution but they also want to be free-riders when it comes to funding that solution. This is an ongoing theme of my posts and I hope you're picking it up and really thinking about it.

Tom C. summed it up nicely: it's about balance. But how do we find the balance between environmental and market goods?

As the damage from the Gulf spill is revealed in the upcoming months and years (and decades no doubt), we can only hope that progress toward that balance is made.