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Pollution And The Bp Oil Spill Crisis Economics Essay

From an economic perspective, the cost of polluting the planet earth is rarely taken into account and as a result, pollution has become a part of every-day life. In recent times, the earth’s waters and atmosphere have become increasingly polluted. For example, the dramatic Deepwater Horizon oil spill by the Gulf of Mexico, North America will have a huge ecological and economical impact on the surrounding areas. The oil and gas firm BP are held mainly responsible for the spill. The impact of the activities carried out by such oil and mining firms is destructive to the world’s natural processes. If the activities of such firms do not undergo remodelling procedures in the near future, there are colossal repercussions soon to punish our ignorance.

Pollution can occur in several ways. This can be through the emission of smoke and soot from factories into the atmosphere, the deposition of chemicals in a river and more simply the creation of greenhouse gases from running of a car on a daily basis. The Deepwater Horizon oil spill is a prime example of pollution. The spill began when the Deepwater Horizon oil drilling rig exploded on 20th of April 2010. [1] From this point, an environmental disaster began to unfold: resulting in many outcomes beyond complete repair. It is estimated that over 4.1 million barrels of oil was spilled [2] until the oil well was capped on 19th of September 2010. It is almost impossible to calculate a figure for the cost of damage incurred as a result of the spill.

Pollution is known as an “externality” as it is an unintended produce of human activity. As it has a harmful impact on the environment (providing less utility than the damage it causes), and it is known as a negative externality. Generally, households have a huge carbon footprint (one figure suggests an average of 10 tonnes of carbon dioxide per family annually) [3] from the day to day running of cars and electronic devices. The pollution produced from powering such technology contributes to global warming through the “greenhouse effect.” More specifically, there are numerous negative effects which have arisen from the BP oil spill. Some examples include the loss of habitats and deaths of several species such as dwarf seahorses [4] fish, crabs, stingray and eels [5] . These events are the results of the oil which has been deposited in the sea. The oil itself has been drenched into animals such as birds and dolphins [6] which have been found in danger on beaches around the coastal areas as a result of the oil containing toxic components. Also, aquatic animals have suffered from a drop in oxygen levels near the spill [7] . The spill will create gaps in the food chain since organisms will die as victims of the spill. This will affect organisms ranging from organisms as small as tiny phytoplankton to larger fish. Although small in size, the smaller organisms are often described as “engines of the entire ecosystem.” [8] Further damages include oil deposits on beaches and the mainland around the Gulf coast. The harm to the land and seas are huge but it is impossible to calculate an exact figure.

Since we cannot calculate the exact cost of pollution, it is a market failure. There is no market for pollution in society. As nobody has property rights to the seas and the atmosphere, the cost of damaging both does not currently have a place in the market - nobody is entitled to compensation for damages. The price of oil is relative to the cost BP pay to extract it from the ground using machinery. This is known as the “private cost.” For example, the cost of BP producing a barrel of oil was $7.70 per barrel of oil in 2009. [9] 

However, there remains an unanswered question – how much does pollution cost the environment? Pollution has a huge effect on the way that the environment functions. The total cost of pollution, taking all areas into account (including environmental damage,) is known as the “social cost.” If oil and mining firms such as BP paid the social cost of their products, it would cost them far more money to offer their product on the market. One study by and environmental damage estimation company called “Trucost” estimated that the cost of the damage incurred by the top 3000 companies in the world was up to a value of 2.2 trillion US dollars (1,400,000,000,000 pounds.) It is thought that not all factors have been taken into account when calculating this figure and, in reality, this figure is more than likely to be far higher. [10] 

As a result of the low production costs of goods such as oil and gas, this has caused the private cost being at a comparatively low level. However, the social costs of pollution are astronomical in comparison. The following graph illustrates the cost of pollution – taking both social cost and social benefit (total gained) from pollution into account:

11

From the graph it is clear that at a low level of pollution, the social cost of pollution is lower than the total benefits. Therefore, the amount gained from polluting the planet exceeds the cost in terms of money and damages to the environment. For example, if the Deep Horizon only leaked a small amount of oil, the amount of damage incurred would be less than the amount the consumer would gain from using the oil as a product. This would result in mining and oil extraction firms increasing production levels until P­­0 pollution levels. At P0 the social benefit and social cost are equal and they are at equilibrium. At equilibrium, the amount of damage from pollution is equal to the amount gained by making use of the fuel. However, when the level of pollution increases, the costs increase exponentially at rapid rate and rises far above the social benefits. As the amount of pollution is large (P2) in modern day society, it is clear to see that the cost of pollution far exceeds the benefits. As pollution has been apparent since the formation of our planet, it is clear that it is natural for some forms of pollution through activities such as lightening and volcanoes. However, the level of pollution from human activities such as the burning of fossil fuels has increased the severity of issues such as acid rain, the emission of greenhouse gases, smog and inevitably climate change. By reviewing the damages from the activities of the human race, it is clear that there is need for change. If oil and mining firms like BP continue to damage the ecosystem of our planet, the effects are going to become more deadly sooner rather than later.

As the social cost of pollution continues to be greater than the social benefits, action is required to reduce the level of pollution: and as a result reduce the total social cost. The effects of allowing oil and mining companies to extract enormous amounts of fossil fuels are already apparent. The seas have become increasingly polluted; the ice caps are melting at an unhealthy rate as a result of increasing temperatures. [12] However, it is still possible for our way of life to change and this has been proven by events which have happened in the past.

There are some methods which can be utilised to reduce pollution. This is where the social benefit is equal to the social cost. Firstly, the UK government has created areas where pollution is illegal since the Clean Air Act of 1956 [13] . The effect of this change in law is demonstrated in the following table:

Year

1958

1974

1998

Million tonnes of smoke emitted

2.0

0.8

0.2

Source: 13

This shows that the power of the government can influence the amount of pollution produced. This has reduced the social cost of pollution from smoke by at least 90% since 1958. This has obviously reduced the social cost of smoke emission. Therefore, it is clear that the governments of the world have the power to unite and reduce pollution. This can be done through a variety of methods. Firstly, a “green tax” could be imposed on firms for pollution. For example, BP could be charged per tonne of CO2 and other pollutants that the fuel will produce when combusted. This would increase the cost of fuel and would price production out of the market: Blake(1993) expresses data which can be interpreted in the following graphical fashion:

14

The increase in the supply cost is a result of taxes pressed by a governing body. This shifts the supply curve upwards as the suppliers are now responsible for paying some of the environmental costs. As supply and demand does not intersect on the graph, fossil fuel mining would no longer have a place in the market. Consequently, the total level of pollution would decrease. However, if the pollution discharged was stopped altogether, the lost benefits would exceed the social savings. Therefore, the level of tax could perhaps still be high, but at a level where the supply and demand intersect at a high price, but low demand. This would limit damage to the planet as demand would decrease and this would have a knock-on effect and decrease supply. This would be extreme actions to take, and it would be highly unlikely to be carried out worldwide. As a result of the Deep Horizon spill, BP is facing costs of up to 21·4 billion pounds in compensation for the cleanup. [15] However, some of the damage is irreparable and will impact the ecosystem to a great extent in years to come.

Another idea from Samuelson & Nordhaus (2001) suggests carbon rationing could become a method of controlling pollution. [16] Instead of taxes, the government or governing bodies can now control the total amount of pollution which can take place in an area. Firms must purchase a permit for the amount of pollution they are to produce and this is reflected in the price of the permit. Since supply of the permit is likely to be short, demand will be greater than supply. As a result, the price of the permit will be increased. The benefits from this are that governments have control over the approximate amount of pollution taking place, and also the social costs of pollution are taken into account. If carbon rationing were to take place, then a separate fund could be formed to prepare for disasters such as the Deep Horizon spill.

The above ideas provide different solutions to the general care-free attitude to pollution in recent times. These are two of many more possible solutions. The severe consequences of over-polluting are putting the future of our planet in danger as we are not allowing it to develop at a natural rate. If we fail to take global action against the mining of fossil fuels using methods such as those outlined above, then an inevitable climax is likely to be met. Looking at the past, we have not learnt from the disasters such as the oil spill which took place during the Gulf War in 1991. This resulted in over a billion barrels of oil being spilled which this day the world is still recovering from [17] . It is clear to us the damage that pollution such as oil spillages can do to the environment and we must change our conduct.

In conclusion, there remains an issue in society such that the cost of polluting our planet is not taken into account. The social cost of mining and extracting fossil fuels is greater than the private cost to firms such as BP as it results in dangerous consequences. Therefore, we are causing excess damage to the environment. There are methods such as taxing and oil rationing which provide steps to find the equilibrium between social benefit and social cost of pollution. In years to come, the human race may pay the ultimate price for their ignorance towards the consequences of pollution – our planet will die.

[END OF RESPONSE]

Word Count: 1,988

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