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.

Some Taxes Might Make Our Future Society Healthier.

This New York Times article discusses the various arguments that economists and others make for imposing taxes on consumption as a possible way to raise tax revenue during tough economic times. The article states that there has often been economic support of “taxing consumption rather than income, on the grounds that consumption taxes do less to discourage saving, investment and economic growth.” The author of the article then proceeds to argue that consumption taxes are usually placed on goods which, when consumed, produce unfavorable effects on third parties not involved in the consumption of the good, aka (in terms we have used in class) goods that have negative external costs in consumption. The author argues that a lot of the time, when the government imposes a specific tax on the consumption of a good with negative externalities, like gasoline, the consumer will internally think more about the costs their gasoline consumption has on the environment, road traffic, and their neighbors’ daily activities, which is good for society as a whole (especially if the consumer decreases their gasoline consumption).

However, this article was especially interesting to me because it introduced new information about consumption taxes and the role of government in individuals’ lives that I had not thought about before. In the instance of a good like cigarettes, is the negative externality produced when the good is consumed more detrimental to society or to the consumer himself? The article argues that “if the consumption induces say, smoking- or obesity-related illness, it raises health care costs, which we all pay for through higher taxes or insurance premiums…Yet this argument has a flip side: if consumers of these products die earlier, they will also collect less in pension payments, including Social Security .” When considering all of these elements, what is the actual external cost of consumption of cigarettes on society? How does the government know how to tax cigarettes appropriately (as cigarettes will always be taxed)?

On a similar note, the article also addresses the issue of negative costs of consumption on the actual consumer in the future aka “the person today enjoys consumption, but the person tomorrow and every day after pays the price of increased risk of illness.” As the title of this article suggests, should we give the right to tax specific goods which produce negative costs of consumption for the consumer, like drinking soda, to the government in order to save our future selves from our current selves? If we do, this means society acknowledges that one’s present self is a different person from one’s future self, which is an interesting idea to consider. Also, would taxing soda and other high sugar goods have a positive effect on society today? Or just in the future? How would individuals in society feel about the government placing taxes on goods that they deem unhealthy for future society? Is this giving the government too much control? This article raises many valid points as to how negative costs associated with consumption can be appropriately taxed, but it also seeks to question if it is in the public’s best interest to give the government the right to decide what is healthy and what is not for individuals.