28 Jan 2014

Moral hazard and poisoned water

Insurance companies invented the expression "moral hazard" to describe the risks that people take when others bear the cost of their folly, e.g., drivers who take more risks because they are insured for accident damage.

I've said, many times, that bureaucrats and politicians need to bear more risk from the actions they take (here's my application of this idea to water managers [pdf]), but the same rule applies to businesses, since they can easily cause harm (accidentally or not).

As an example, consider how Freedom Industries responded to numerous claims for compensation as a result of spilling toxic chemicals in the river supplying drinking water to West Virginia's capital. They declared bankruptcy.

I know that some people will blame "capitalism" for this spill and the lack of money to address its damages, but capitalism operates within a legal and political system. Regulators and politicians define how that system works, but those of West Virginia -- like those of the US government with the Deepwater Horizon spill -- may have been too business friendly is allowing the company to operate without significant accident insurance. (Oh, and there's the little problem of the leaking tank having last been inspected in 1991 or so.)

Bottom Line: Government regulators have a duty to ensure that businesses pay their costs, not just collect their benefits.


Anonymous said...

When business interests capture the regulatory proceedings, it's full glibertarian paradise away. Hooray! Can't fail, only be failed.

David Zetland said...

@anon -- don't know who these glibs are, but their certainly NOT libertarian, as the whole point of libertarian politics/economics is to prevent crony capitalism.

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