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Chapter 19: Problem 2

Petroleum firms drill for oil in the Gulf Coast. Accidents on oil rigs that cause spills impose a negative externality on the inhabitants of the Gulf Coast states. Identify two ways oil drilling and its harmful effects could be reduced using your knowledge of externalities and behavioral economics.

Short Answer

Expert verified
Two possible ways to reduce oil spills in the Gulf Coast include: 1) Incentivizing firms through mechanisms such as taxes on harmful behavior and subsidies for environmentally friendly practices. 2) Implementing stricter regulations for drilling and fostering awareness among firms about the environmental implications of their actions.

Step by step solution

01

Understanding the Negative Externality

First, it's crucial to comprehend what is happening in the scenario. The negative externality here is oil spills caused by accidents on oil rigs, negatively impacting the inhabitants of the Gulf Coast states.
02

Applying Behavioral Economics Concepts

Next, apply the basic principles of behavioral economics to identify possible solutions. From a behavioral standpoint, firms can be incentivized to reduce such behavior. This could be through mechanisms such as imposing taxes on harmful activities or providing subsidies for environmentally friendly practices.
03

Applying Externality Concepts

Finally, consider ways to reduce the externality from an economics perspective. One way would be to establish stricter regulations and standards for drilling operations. Another could be creating awareness and educating firms on the impact of their actions on the environment and encouraging them to adopt safer practices.

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