BP oil spill and its externalities

On April 20 2010, there was an explosion on one of BP’s drilling rigs approximately 50 km offshore and over 1000m underwater in the Gulf of Mexico. This has led to more than 5000 barrels of oil leaking into the sea daily. Several failures to curb the leaks have led to the slick expanding and covering an area bigger the size of Luxembourg. Despite having a solution found now, it has definitely led to many problems.

Externalities- the third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid to the third parties. 

Externalities will lead to market failure when the price mechanism does not take into account the full social costs and benefits of production and consumption.

Negative Externalities of the Oil Spill

  • Millions of dollars lost due to production of shrimps, fish and other fish products by the fishers, increasing prices of seafood.(Food costs are already rising for restaurateurs. Wholesale food prices rose 7%  in the 12-month period that ended March 31, with certain commodities spiking much more, such as unprocessed fin fish (a 48 percent price jump).
  • Unemployment and the lost of  incomes derived from the billion dollar tourism industry of Louisiana and Florida(e.g. fishermen)
  • Cost of wildlife and wildlife breeding grounds lost
  • Killing of sea life and other wild life
  • Destroying habitats
  • Lost jobs due to the suspension of deep water drilling operations
  • Health costs of cleanup workers in the front line
  • Cost of air pollution ( people living at or near coastal areas may suffer from health issues such as respiratory related ailments in the future)

Positive Externalities of the Oil Spill

  • Millions of feet of boomers employed to prevent oil from spreading (increase boomer production leads to increased income for  manufacturers of this material)
  • Producers of dispersants benefited as millions of dollars were spent on dispersants
  • Thousands of  kiddies scoopers were sold at $2 each benefiting the manufacturers
  • The increase in demand for respirators would mean an increase in income to producers of this device.
  • 30,000 cleanup workers were hired(increase employment)
  • 200 portable toilets were rented at $200,000 per month( increasing income of providers more than 3 times)
  • Hotels in the gulf area are fully booked for six months which means increased income
  • $360 million for a project to build six sand berms meant to protect Louisiana’s wetlands from spreading oil
  • Income derived from production of technologies to cap like robots and capping domes, etc.


For many, the oil spill will have a noticeable impact in both the short and long terms, said Matt Rafferty, economics professor at Quinnipiac University’s School of Business in Hamden.

“It’s pretty basic supply and demand. There’s an immediate reduction in the supply,” he said, meaning prices will rise.

The Gulf Coast is the cheapest seafood supplier available to businesses, he said, so taking it out of commission, even temporarily, will affect prices. “It’s our cheapest, best option. If you eliminate that, you go on to your next best option. The question is, what will that next best option cost?”

The oil spill has economic implications beyond price increases, he said, with many fishermen’s livelihoods taking a toll — not to mention the extreme environmental concerns.

Tan Siong Min


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