Regulatory Wishful Thinking or Long Live Pigou

Professor Gerard has posted numerous articles on regulatory policy,  some of which rest on the theme that regulators will be captured by the industries they are assigned to regulate.  Simon Johnson, in today’s   Economix  blog, focuses on both oil and financial regulation.  He argues that living wills, that is strategies businesses might design to deal with their own failures, are not the solution for either industry.  He notes that oil companies other than BP had similar plans for managing the risks of a major oil spill in the Gulf of Mexico.  In fact, many had hired the same consultant to write their plans.  Such plans demonstrated limited knowledge of the Gulf as well as limited preparedness.  Stated differently, they had very little incentive to write constructive plans.

If we want private companies to respond to potential catastrophes or even continuous negative externalities, we need public policy that encourages them to do just that.  Of course,  such public action requires that our legislators and the Executive branch need to both address the societal tradeoffs our nation must face and face-down the lobbyists who seek to postpone such action.  Perhaps our policy makers should be tested to see if they support the manifesto for the  Pigou Club or a bit smaller challenge, if they know Pigou’s contribution to welfare economics.