The Economics of a Disaster: The Exxon Valdez Oil Spill

The Economics of a Disaster: The Exxon Valdez Oil Spill

The Economics of a Disaster: The Exxon Valdez Oil Spill

The Economics of a Disaster: The Exxon Valdez Oil Spill

Synopsis

The Economics of a Disaster represents a major contribution to the understanding of the economics of liability and damages. It is based on the assumption that if people know they can be held responsible for some or all of the costs or damages sustained in an environmental accident, they will change their behavior to make the accident less likely to occur or to reduce the damages should it occur. The work develops a framework to examine and measure changes in market conditions after a disaster, showing the kinds of information that need to be collected and analyzed. Based on the Exxon Valdez case, this work provides an interesting framework for practitioners, specialists, and scholars in the fields of business, economics, law, and environmental studies.

Excerpt

If the consequences of one's actions are felt only by one's self, one will take optimal precautions to avoid accidents. Economists predict that a rational person will invest in accident avoidance just enough resources so that the marginal cost of accident avoidance equals the marginal benefit of accident avoidance. This minimizes the total of the two costs: the cost of accidents plus the cost of precautions.

In the case of accidents that affect others, the individual's incentive to take precautions is not optimal, unless the liability system acts to "internalize" the costs of accidents. Various liability rules (such as strict liability, negligence, and no fault) affect people's incentives to take economically appropriate precautions. If people know that they can be held responsible for some or all of the costs or damages sustained in an accident, they will change their behavior to make the accident less likely to occur or to reduce the damages should it occur.

Some liability systems produce too much precaution; others produce too little. An excessively cautious individual may reduce the chances of an accident to zero by staying home in bed all day, but the cost in lost income would be very high. Similarly, a liability system that yields too much precaution may lead manufacturers to produce the only perfectly safe airplane--one that never leaves the ground. Conversely, if the liability system did not allow people involved in automobile accidents to sue the responsible party for damages, drivers would have less incentive to be careful. The actions people take every day indicate that individuals and society accept the riskiness of some activities. Eliminating all risks, if possible, would be overly cautious.

Any liability system that seeks to optimize the trade-off between the costs of accidents and the costs of preventing them must take into account, among other things, all the costs associated with accidents. If some important category of costs is ignored by the system, individuals will tend to take too little precautionary action. By the same token, if the system exaggerates the costs, there will be a tendency to take too much precaution.

The common sense observation that all costs associated with accidents should . . .

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