Friday, 11 June 2010

My own views - The BP Oil Spill - Classic case of Negative Externalities

By Girish Menon

BP's (British Petroleum) oil leak off the coast of Louisiana raises a great number of issues that are relevant from an economic point of view:

Firstly it is difficult to estimate what is the actual amount of oil leaking into the sea. Today BP says it is 40,000 barrels / day. So as a sceptic who does not believe company PR statements, it might be higher - how high one wonders.

Secondly, how does one measure the level of the negative externalities involved (Cost Benefit Analysis). The fishermen in a wide region have lost their livelihood, oil exploration on the coast has stopped - so oil workers from non BP firms have lost their jobs,the tourism industry in Florida has been affected. The damage to the ecological environment. The list goes on. Also how many years will it impact the environment is difficult to contemplate.

The ironic part of it was that until recently, BP not mindful of the externalities it has created was getting ready to pay £10 billion in dividend to shareholders. So, it goes to the basic point that BP's profits are high because its production costs never include the negative externalities it creates. And usually the public pays, for the profits of BP shareholders, with cuts in their services since the tax money may be used for cleaning up operations. A classic case of privatisation of profit and socialisation of cost. Similar to the bailout of banks some time ago.

Yet one of the causes of this accident could be inadequate regulation and the desire to cut costs. Health and safety regulation has often been criticised as increasing production costs of firms. Yet those who have blind faith in markets continue to insist on lesser regulation for these oligopolies.

The good thing is that the accident happened off the US coast and forced Obama to take notice. I say good because in 1984 there was the world's largest industrial tragedy in Bhopal, India caused by a now wound up US firm called Union Carbide. Those dead, in hundreds,were paid paltry compensation, the firm's owners have escaped and the place is as poisonous as ever. The Indian government has been bought over by the MNC, which was cheaper than paying for the externalities, and most managers of Union Carbide would die in their homes instead of going to jail for even one day.

So one could conclude that abnormal profits of most firms may include the negative externalities that they may have passed on to the tax payers of that country. Hence there is a greater need to redistribute this wealth.

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