In an interview on National Public Radio this week, Mississippi Gov. Haley Barbour said that the Gulf oil spill was an example of the free market working properly. He reasoned that BP had the most to lose from the spill, namely $100 million per day in costs. And thus, BP had the greatest incentive to clean-up the oil spill.
His conclusion is odd: The market functions properly when an oil company has repeated safety violations, ultimately causing an oil rig explosion that causes a loss in lives and perhaps the greatest environmental catastrophe in history. That is a proper functioning market?
His reasoning is equally odd: Because the accident is costing BP a fortune, the free market is working properly. Governor Barbour should be less of a zealot. If monetary costs are the greatest incentive for BP, it is not the market that should be celebrated; it is government regulation. If deterrence through heavy costs is the best method to address problems like this, then regulatory fines are a better deterrence than the free market (which by itself does not impose any obligation on a company for negative externalities).