Friday, June 18, 2010

Sorry About That

Republican Representative Joe Barton apologized to BP for the "shakedown" the company has received from the White House. Then he apologized for apologizing and took back the word "shakedown."

What was he thinking? Look, the minimum penalty for causing an environmental catastrophe has to be forcing the company to internalize the cost that it has imposed on the rest of us. We don't know exactly how much it's going to cost to clean everything up and compensate those who have lost income, but something in the billions seems highly likely. I don't know if it'll be more or less than $20 billion, which is the amount of the compensation fund BP has set up, but that seems like it's in the ballpark.

The compensation fund seems right on target. People are calling for criminal penalties, but there's nothing like good old money to motivate profit-seeking corporations. Let's say BP saved a couple of million dollars by taking safety shortcuts when building the well. Socking them up for $20 billion, which is 10,000 times that amount, is a powerful incentive. It would cause a rational company to tell its employess, "don't try to save a couple of million by taking safety shortcuts if there's even a 1 in 10,000 chance that it might go wrong and cost us $20 billion."

If we could force profit-seeking companies to perfectly internalize all the external costs that their operations impose, they'd have exactly the right incentives. Of course, the external costs can never be perfectly measured and in most cases there's a lot of litigation costs and uncertainty. But a $20 billion compensation fund seems like a good start.

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