It's a stretch to say that anything good comes of disasters like these, but Valdez gave us the Oil Pollution Act (OPA), and considerably tighter standards on shipping. Valdez also greatly accelerated the use of non-market valuation methods, especially contingent valuation (CVM), advancing the science and practice of economic valuation at speeds that would have not occurred otherwise. We'll study CVM in lecture 4. You can read about some of the value estimates here at the Encyclopedia of Earth entry for the spill (scroll down to the section on "economic impacts").
The Gulf Coast spill should have similar legal repercussions. Of particular interest is the legal cap on liability. OPA limits liability to $75 million, which was a lot of money in 1990, but seems far too low today. The White House is already pushing for the cap to be removed, but as good students of economics, we have to ask if things might have been different had the cap been changed earlier.
The topic here is "moral hazard" and it's one that has been in the news a lot lately (bank bailouts). Basically, if you have really good insurance (coverage against loss), you're more likely to engage in risky behavior. In the context of the Gulf Spill, if the responsible party were liable for 100% of the damages (with no maximum), would they have taken more caution than if their liability were limited?
Here's a long quote that addresses the point:
"If the consequences of one's actions are felt only by one's self, one will take optimal precautions to avoid accidents. Economists predict that a rational person will invest in accident avoidance just enough resources so that the marginal cost of accident avoidance equals the marginal benefit of accident avoidance. This minimizes the total of the two costs: the cost of accidents plus the cost of precautions.
In the case of accidents that affect others, the individual's incentive to take precautions is not optimal, unless the liability system acts to "internalize" the costs of accidents. Various liability rules (such as strict liability, negligence, and no fault) affect people's incentives to take economically appropriate precautions. If people know that they can be held responsible for some or all of the costs or damages sustained in an accident, they will change their behavior to make the accident less likely to occur or to reduce the damages should it occur.
Some liability systems produce too much precaution; others produce too little. An excessively cautious individual may reduce the chances of an accident to zero by staying home in bed all day, but the cost in lost income would be very high. Similarly, a liability system that yields too much precaution may lead manufacturers to produce the only perfectly safe airplane--one that never leaves the ground.
Conversely, if the liability system did not allow people involved in automobile accidents to sue the responsible party for damages, drivers would have less incentive to be careful. The actions people take every day indicate that individuals and society accept the riskiness of some activities. Eliminating all risks, if possible, would be overly cautious.
Any liability system that seeks to optimize the trade-off between the costs of accidents and the costs of preventing them must take into account, among other things, all the costs associated with accidents. If some important category of costs is ignored by the system, individuals will tend to take too little precautionary action. By the same token, if the system exaggerates the costs, there will be a tendency to take too much precaution"
It is interesting to note that this was written in 1995, in a book titled: "The Economics of a Disaster: The Exxon Valdez Oil Spill" by Argue, Furchtgott-Roth, Hurdle, Mosteller, and Owen.
Seems pretty timely now too.Thoughts or questions?
Applying basic supply and demand modeling, what kinds of effects do you think we'll see in the wake of the Gulf spill?