Friday, 8 October 2010

Steve Landsburg getting it wrong about the BP oil spill

Steve Landsburg's Big Question blogspot can't get anything right when it comes to Economics. Why? The man has shit for brains.
This is him on the BP oil spill
When big companies (like, say, British Petroleum) wreak great havoc (like, say, by spilling millions of gallons of oil into the Gulf of Mexico), it can be good policy to make them compensate their victims (like, say, with a $20 billion claim fund). It can also be bad policy.

A.C. Pigou taught us that we get better outcomes when decisionmakers bear the costs of their actions. Ronald Coase taught us that Pigou’s lesson cuts two ways. The shrimp boats that are sitting idle today are sitting idle partly because BP decided to drill in the gulf, but also partly because the shrimpers chose to operate in the vicinity of an oil rig. In this case, making BP feel the costs of its own decisions entails insulating the shrimpers from the costs of theirs.
In this particular case, I’m inclined to believe that it’s a good thing for BP to pony up. But contrary to what I’ve been reading around the web, there’s absolutely nothing in economic theory to dictate that conclusion; instead the conclusion depends on the particulars of the case. Is it cheaper to deal with the problem of spills by encouraging oil companies to be more responsible, or by encouraging others to stay out of their way? That’s an empirical question. Theory can’t answer it.

Why is this silly? Both shrimp and oil are good things. We want more of both. What we don't want is petrol in the water where it does us no good and others a lot of harm. Making the polluter pay the full cost (i.e. all negative externality costs to all agents) gives him an incentive to be more careful. Permitting compensation to shrimpers reduces uncertainty for that industry and, ceteris paribus, yields us more shrimp- which is what we want.
If the oil industry has an adequate incentive to avoid oil spills- that is that much more oil that gets to market rather than ends up killing shrimp. Which is a good thing.
Furthermore, there is a dynamic aspect which the head-up-his-own-arse Larnsburg does not mention.
Oil is a technology driven business. By penalising pollution you get innovation such that, it may be, the industry itself will be on a better time-path than if the sanction were not applied.
Why is Landsburg writing this crap? Fuck is wrong with him?
The answer is that he is confusing 2 different things viz. goods in joint supply as opposed to catastrophic consequences.
Let's take an example.
I'm a blacksmith living alone in the middle of a great plain. You come and set up house next to me and then sue me for damages for the suffering caused to you by the excessive noise of my hammering. Now, in this case, the hammering is in joint supply with my work as a Smith. Welfare Econ can't say in advance whether your getting damages from me in this instance is a good or bad thing.
On the other hand suppose a fire breaks out in my smithy which burns your house down. That's a catastrophic consequence not something in Joint Supply. The burden should fall on me because only I can internalize this externality by taking into account the Expected full social cost of the catastrophic contingency thus purchasing the correct amount of cover, or investing the right amount in preventive measures. Notice, the shrimpers have no means of calculating the risk of catastrophic spillage- only BP does. In Econ the guy who has got the info. and can do something about it, is the guy who should pay. That's how you get rational decisions.
But all this is High School Economics- if not common sense. No need to mention Pigou or Coase.
Is Landsburg really as stupid as his disingenuous blog post would indicate? I guess his policy is 'never give a sucker an even break'. There are stupid people on the Net. Trawl for them by writing shite. What's the harm?

No comments: