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LP Monday Message: Liability limits make oil spills worse

May 10, 2010

Dear Friend of Liberty,

You've probably seen a lot about the big BP oil spill in the Gulf of Mexico.

Libertarians are sometimes attacked for not having good answers to environmental questions. In this case, I think there are problems that Republicans and Democrats in Congress have created, and Libertarians would have handled things differently.

(If you're not particularly interested in detailed policy studies or arguments, it's always good to remember that Libertarians try to base our positions on fundamental principles of freedom and personal responsibility.)

I think a big problem here is the fact that federal law limits the liability of BP (and Transocean, the company that actually owned the rig.)

The New York Times has reported that federal law limits BP's liability to $75 million, and Transocean's liability to $65 million.

These kinds of artificial liability limits distort the markets, and basically create "moral hazard" by encouraging companies to act in riskier ways than they would otherwise. If BP's well causes damage to property, then BP should be fully liable for all of the damage. It is BP's reponsibility to "make whole" whoever gets damaged.

If Congress hadn't limited BP's liability, it's likely that BP would have acted differently. Knowing that a spill could cost them billions, BP might have demanded additional safeguards for their well, or tested their safeguards more thoroughly. These choices would have been expensive, but they might have prevented the huge costs that the spill area is now facing.

BP has said that it will pay all "legitimate claims," even if they go past the liability limit. The problem is that when it comes to property damage, a court should decide what "legitimate claims" are, not the offending company!

Of course, now we're likely to see a flurry of reactive legislation, as members of Congress try to pile on BP for political reasons. And, Congress will probably use the spill as an excuse to increase its market interference and shovel more subsidies into uneconomical "alternative energy."

(It's possible that if energy companies did not have the benefits of artificial liability limits, the market might decide that some alternative energy would be cost effective. But that's for the free market to decide, not Congress using taxpayer subsidies.)

As the Libertarian Party platform says, "Free markets and property rights stimulate the technological innovations and behavioral changes required to protect our environment and ecosystems."

Congress should take this opportunity to get out of the market, but instead they'll probably create new subsidies, special commissions and government agencies. It's just one more good reason to support Libertarian candidates in the elections this November.

Finally, be wary of politicians who make it sound like government can lead us to a utopia free of accidents. Even if a world with no man-made disasters were possible, natural disasters such as volcanoes, earthquakes, hurricanes, and epidemics would still happen.

Sincerely,

Executive Director
Libertarian National Committee

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