Randall Parker recently sent an email to a few economics bloggers about nuclear power plant regulation. In particular, he asked whether we think that the Price-Anderson Act, which limits the liability of nuclear power plants for accidents, represents an excess subsidy for power plants.
I responded that I thought that the question was whether power plant safety was based on a proper balance of private and social costs. I remarked that I thought that a regulatory agency probably could create this balance more effectively than the tort system. Lynne Kiesling disagrees, and let me quote from her email.
I think Price-Anderson does distort energy markets (plural). I have skepticism about the ability of a central authority operating under both political and economic pressures to be able to assess relative risks better than decentralized agents who have financial incentives to get the assessments as close as possible. Political processes also tend to result in too much insurance at too high a price (note, for example, the recent FDA activities and the standard zero-tolerance stance that emanates from many regulatory institutions).
I also think the negatives of the moral hazard created by such implicit subsidies are pretty large. Neither tort systems nor regulatory institutions are well suited to relative risk assessment and risk management. But if we rely solely on rigid, static regulatory institutions implementing politically-motivated, rigid regulations, how are we going to discover/create other institutions that are better suited?
In fact, I become increasingly convinced that the development of the re-insurance industry reduces the argument for regulatory treatment of such discrete, large risk issues as nuclear. If SwissRe and their ilk could integrate nuclear into their reinsurance portfolios, that might give them some very interesting dimensions for risk spreading ...
At this point, let me bring the debate into the blog space. First of all, her case for the dynamism of markets vs. the rigidity of political institutions is exactly the one that I make in Learning Economics, so I can hardly disagree.
My comeback to Lynne would be that I like reinsurance, and I agree with all of her criticisms of regulation. I believe--or at least I am willing to stipulate--that if the task were estimating the true cost of a nuclear accident and providing the appropriate incentives for power plant owners to prevent such an accident, then the private sector might do it best.
However, the problem that the insurance companies have to solve is not estimating the true cost of a nuclear accident. The challenge is to estimate the cost that the tort system will assign to a nuclear accident.
The biggest risk within the context of the tort system may be that a small event or a non-event is used by trial lawyers as an excuse for a billion-dollar lawsuit. They find a few plaintiffs living near a nuke plant with horrible illnesse and parade them in front of a jury. The jury looks at these miserable people and at the deep pockets of the plant owners and the insurance companies. The result is a huge award. The fact that the illnesses have nothing to do with the nuclear power plant makes no difference.
I trust regulators less than markets. However, I trust jurors in class-actions suits less than regulators.
Watch this space for updates. I'm hoping Lynne will follow up.