Spillover Effect

As millions of gallons of oil choke the waters, wildlife and livelihoods of Louisiana, Mississippi, Alabama and Florida, armchair economists wade through the muck of deceit that parties involved share with the news media, in order to gauge the "true" costs of this ecological nightmare. As Austrian economists, we immediately wonder who pays which costs.

Environmental catastrophes, such as the exploratory oil rig spill in the Gulf of Mexico, present an opportunity for neoclassical economists to discuss the "negative externalities" inherent to fossil fuel consumption. Generally speaking, externalities represent the costs to those who were not contracting parties to an exchange - the costs to society which are not reflected in the price of the good or service consumed. In the case of Transocean's Deepwater Horizon exploratory rig, the negative externalities of oily water and air pollution associated with the spill and cleanup result in closed shipping lanes, lost tourism and grounded commercial fishing fleets to name just a few costs. There are those who look to our Uncle Sam to stem the flow of crude from reaching America's fragile coastline, and with good reason. Thanks to public mandate and finances, the U.S. Coast Guard is the most capable emergency responder in this instance. So who pays?

In order to "internalize" the externality - to create a neoclassically efficient outcome - a price must be put on the extraction of crude oil to offset the harmful consequences that such spills can cause. Yet government regulations, created by women and men in tidy offices in a faraway city who entertain the advocates of the petroleum industry, never solve the "problem," that is, unwanted spillover of oil into ocean water, without creating a new unintended consequence - most likely in the form of mandated controls and redundant safety equipment which consumers will fund through their gasoline purchases.

Perhaps a less forceful, more sensible approach to the remedy for this disaster has already begun. As a primary party to the accident, British Petroleum will spend over $100 million for the resultant cleanup. The degree to which BP and Transocean are at fault for causing damage to fishing, tourism and commercial shipping should be determined by courts of law. Parties hurt by the spill can seek damages in a well-functioning civil court system. The question of who pays and how much revolves around the issue of who has the property right to what, an issue most effectively settled by the judicial system. Ship owners, shrimpers, even beach combers all have a potential claim against the offending parties. As a result, the oil rig owner and the petroleum refiner may incur enormous costs to satisfy the plaintiffs. As it should be. Only limited liability and government protection stand in the way of justice being served.

One possible extension of the application of property rights to help determine how cleanup costs shall be determined is government claiming domain over the coastal waters, if citizens mandate that government regulate what may not be put into coastal waters. Regardless of whether The Force or individual parties have rights to unspoiled ocean water, I hope that the bill for damages presented to BP and Transocean is thorough and memorable.