British Petroleum Externalities

This post by the New York times makes an overview of the greatest accidental oil spill in history. On the 20^th of April an explosion caused by a drilling rig working on a well for the BP oil company one mile below the surface of a gulf stream of Mexico lead to a major oil leak which continued for 86 days before 15^th of July when for the first time oil was prevented from gushing into the gulf. According to the press, the oil slick damaged the ecology as well as the fishery and tourism industries of many regions:

The oil from the gulf spill first made landfall in Louisiana. But in June, tar balls and oil mousse began to reach the shores of Mississippi, Alabama and Florida. Shortly thereafter it began to hit shore, smearing tourist beaches, washing onto the shorelines of sleepy coastal communities and oozing into marshy bays that fishermen have worked for generations. It announced its arrival on the Louisiana coast with a fittingly ugly symbol: brown pelicans, the state bird, dyed with crude.

Without using the economic lingo the press describes the scenario, which is a classic example of what we defined in class as a negative production externality. Various remedies can be applied to these problems to internalize the externality. One of those can be the Coasian Solution which is to hold one party liable for the damage and make it clean the spilled areas (which will bring the socially optimal quantity of pollution) and compensate the suffering parties for the damage. However, as there are huge numbers of people and various industries involved which makes the task of compensating everyone almost impossible. It is also hard to evaluate the damages the leak caused. What if the fisherman were going to have a bad year catching shrimp anyway? And how is it possible to evaluate how many tons of shrimp they would have caught without the spill? And how do you know exactly how much money was lost in tourism indsutry? Furthermore, according to the article the long run negative externalities caused by the spill are still uncertain as large amount of oil is being spread underwater rather than staying on the surface which arises the possibility of risk from oil in deep waters. But regardless of what the solution to the problem is, government needs to create incentives for the oil companies to invest in their technologies and account for the risk better to prevent such disasters before they actually happen in the future.