Drill, BP, drill

People get pretty good at making choices on the margin in their private lives because they have to pay for their mistakes. I would not buy an extra pound of Italian salami unless the pleasure it gives me exceeds the satisfaction from spending the same $10 on alternative delicacies: Greek olives and Bulgarian feta cheese to name but a few. The consumer's willingness to spend his income on specific quantities of selected goods at certain prices directs the producer to bring the right things to the right markets at the right time. The only mechanism that works to prevent shortages and surpluses is the free fluctuation of market prices. Unfortunately, instead of utilizing these forces, we let our collective paranoia play a major role in determining our environmental policies.

The argument for a government fix of such problems is the so-called "market failure" in the presence of externalities and the absence of property rights. For example, we may get too much pollution unless some institutional arrangement supplements the production, exchange, and/or consumption of fossil fuels. Alas, turning to political solutions in this as well as other cases overlooks the problem of "government failure." Legislative proposals such as cap and trade contain a valuable recognition of the great importance of market incentives in any efficient allocation of scarce resources, but how on earth would we determine an efficient "cap"?

The political process lacks strong incentives and objective criteria to evaluate whether the right amount, quality, and distribution of services are provided with taxpayers' money to the general population or any part thereof. Natural sciences do not posses precise tools to determine the socially optimal amount of pollution. We know from the falling prices that the government has successfully fooled us to over-invest in the housing market, but who can tell us if domestic regulatory agencies or international treaties provide too much or too little protection? I like shrimp from the Gulf and I want my beaches oil-free but I have serious doubts that tougher regulation on offshore drilling will deliver the things I desire at a price I am willing to pay. It may be better to tell BP and all of its competitors: "Drill, baby, drill." If you make a mess, we have one word for you: restitution. For guidelines, see God's law (Exodus 22).