The WSJ Edit Page Discovers Market Failure

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JONATHAN CHAIT AUGUST 2, 2010

The WSJ Edit Page Discovers Market Failure

The Wall Street Journal's climate editorial this morning is a perfect display of pro-business ideology untethered to even the pretense of support for the free market. According to the Journal, it's not fair to lift the liability cap for oil spills:

As for the Senate, Mr. Reid's new nonclimate energy bill is all about trying to link Republicans to Big Oil. With BP as the corporate villain, Democrats are proposing to lift the $75 million oil spill liability cap for economic damages to infinity. And to do so retroactively on all rig leases.

This is a bad-faith exercise. Mr. Reid knows that Democrats like Mary Landrieu of Louisiana have criticized Democratic proposals to set even a $10 billion cap, while Senate Republicans have proposed giving regulators the power to raise the cap based on specific circumstances. Mr. Reid's proposal is designed to throw a bouquet to the trial bar and undermine any grounds for compromise so Democrats can have an election issue.

The main effect, if it passed, would be to push the small- and mid-sized producers that account for most domestic drilling out of the Gulf, regardless of their safety records. Only the supermajors would be able to afford insurance under the unlimited liability regime.

Okay, let's think this through. The pure free market position is that oil companies should be able to drill wherever they want as long as they're responsible for their own externalities, like cleaning up the cost of oil they spill. The Journal's position is that this is no fair -- not every oil company can afford to clean up the cost of their oil spills! So the government has to subsidize offshore drilling by promising to cover the cost of any cleanup beyond a given size.

The justification for this corporate subsidy is that even oil firms with great safety records won't be able to afford the insurance. But why not? If they have great safety records,then insurance companies ought to be willing to cover them at some price, right? And that price ought to reflect the likelihood and size of a potential spill. In other words, the free market seems capable of determining the risk level and putting a price on it. And if insurance companies won't cover that risk at a price small oil firms can afford, that means the risk is too high.

That is, if you think the market works. The Journal sees this as a market failure requiring government intervention.

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posted in: jonathan chait, mr. reid, louisiana, mary landrieu, reid, senate

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