Journal of Gov’t Failure: The Great Oil Spill of 2010

The progressives have been using the recent oil spill in the Gulf of Mexico as a launching point to claim that the idea of self-regulating business as a model has failed. Dig a little deeper, and we find that the causes of this spill may be in part due to faulty Government regulation.

Ronald Bailey at Reason Magazine wrote:

In 1990, both houses of Congress passed with nearly unanimous bipartisan support and President George H.W. Bush signed the Oil Pollution Act in the wake of the Exxon Valdez oil spill in Alaska. The 1990 act […] set a $75 million cap on liability on damages to natural resources and economic losses suffered by private parties resulting from offshore drilling spills. However, drillers are responsible for all cleanup and containment costs. The cap does not apply if a company is found to have violated federal regulations or engaged in gross negligence (an issue that will certainly be litigated in this case).

Now the federally approved liability cap doesn’t look like such a good idea. On June 9, Brookings Institution Senior Fellow Michael Greenstone, testifying before the House Committee on Transportation and Infrastructure, argued “the cap creates incentives for spills.” Why? Because if drillers believe that their liability is limited, they will engage in riskier activities than if they feared that they would be responsible for all the costs if things go wrong. While acknowledging that we cannot know whether this incident would have occurred without the cap, Greenstone asserts, “The cap effectively subsidizes drilling and substandard safety investments in the very locations where the damages from spills would be the greatest.”

Now… a company can make any decision it wants to so long as it doesn’t break any law. It’s a free market economy and when it screws up, the onus is – and should be – on them. But when the government comes into the equation, and in an attempt to do something positive, it produces something negative (which is far too often the case) we have to shift at least some of the blame off to the federal government. We also need to be much more careful with what we allow the federal government to regulate.

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