David R. Henderson  

Is the Limit on Nuclear Liability a Subsidy?

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My fellow UCLA grad and former Council of Economic Advisers senior economist colleague applies Ronald Coase-type thinking to limits on liability for nuclear power plants. He writes:

The same principle applies to nuclear construction. If people and owners of property are compensated fully for the damage caused by a nuclear accident -- if the owners of nuclear facilities bear full liability for the adverse effects of accidents -- too many people, businesses and physical capital will be located near the reactors, yielding an increase in damages when a serious accident occurs. This analytic truth holds even for reactors sited in earthquake or tsunami zones; sometimes those are the most appropriate sites for the reactors even given the risks. Accordingly, the Price-Anderson liability limit at least directionally is economically efficient -- it conserves resources -- by providing incentives for those who can avoid the potential damage from a nuclear accident most cheaply to do so, thus preventing some portion of prospective nuclear damage by limiting location choices near the reactors below the levels that otherwise would be observed if public policy imposed full liability on the nuclear owners.

Read the whole thing. It's not long.


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COMMENTS (11 to date)
Mark Bahner writes:
...by limiting location choices near the reactors below the levels that otherwise would be observed if public policy imposed full liability on the nuclear owners.

How does Price-Anderson do that? As far as I know, the taxpayers cover the difference between the full costs of the accident and the liability which the nuclear power owners pay. So how are the location choices near reactors limited to a level below the level that would occur if the nuclear owners were fully liable?

David R. Henderson writes:

@Mark Bahner,
I’m just assuming, because I know Ben, that he got his facts right. Did you read the piece and disagree with his statement of the facts?

RAD writes:

I hinted at the limited liability issue in a comment on Scott Sumner's post about Chernobyl. Unless I misunderstand the scope of the term "damage" in the quote above, I think I disagree somewhat. What we've learned from Fukushima, Chernobyl, and Three Mile Island is that core meltdowns are much more likely than anticipated while health impacts afterwards are almost negligible.

The liability is that we are left with large swaths of land after an accident that can't or won't be used by humans. The property value drops to zero. Great for wildlife if your not interested in cost-benefit analysis.

The argument seems too general in application to be correct. Full liability is usually considered to encourage efficient risk-taking. By Zycher's logic, just about any risky activity should have liability limits so as to induce efficient avoidance behavior. Both points cannot be true.

I would argue the case for Price-Anderson a bit differently. Haven't worked this out carefully, so maybe full of holes. General public has an exaggerated fear of nuclear energy which would impose excessive liability/insurance obligations or result in too much risk avoidance in areas near nuclear plants. Price-Anderson offers a very cheap liability backstop (because a fair estimate suggests highly unlikely to be used) that likely pays for itself. Overall, I think it likely the act supports efficiency-enhancing trades: both more use of nuclear power and greater use of areas surrounding nuclear plants.

anomdebus writes:

Alternately, is limited liability a balance for extra regulatory hurdles placed before construction?

David R. Henderson writes:

@RAD,
Unless I misunderstand the scope of the term "damage" in the quote above, I think I disagree somewhat.
You didn’t make clear what part of his argument you disagree with.
@Michael Giberson,
Full liability is usually considered to encourage efficient risk-taking.
Not true. That was Coase’s point and Ben’s point: full liability on one side gives too strong an incentive to put themselves in harm’s way for those on the other side who can avoid damage at lower cost.

Mark Bahner writes:

Hi, David. You write:

I’m just assuming, because I know Ben, that he got his facts right. Did you read the piece and disagree with his statement of the facts?

Yes, I read the piece. And I disagree with his statement that Price-Anderson has the effect of "...limiting location choices near the reactors below the levels that otherwise would be observed if public policy imposed full liability on the nuclear owners."

That's because, as far as I know, the *taxpayer* pays for the difference between the total cost of the accident and the liability limit of Price-Anderson.

And Wikipedia (which we know is always right...at least, most of the time ;-)) seems to agree with me:

If a coverable incident occurs, the Nuclear Regulatory Commission (NRC) is required to submit a report on the cost of it to the courts and to Congress. If claims are likely to exceed the maximum Price-Anderson fund value, then the President is required to submit proposals to Congress. These proposals must detail the costs of the accident, recommend how funds should be raised, and detail plans for full and prompt compensation to those affected. Under the Act, the administrators of the fund have the right to further charge plants if it is needed. If Congress fails to provide for compensation, claims can be made under the Tucker Act (in which the government waives its sovereign immunity) for failure by the federal government to carry out its duty to compensate claimants.

So it seems pretty clear to me that people around reactors are fully compensated under Price-Anderson...just not by the owners of the reactors. It's surprising to me that Ben Zycher would state/imply otherwise.

Mark Bahner writes:

Hi, David. You write, to Michael Giberson:

That was Coase’s point and Ben’s point: full liability on one side gives too strong an incentive to put themselves in harm’s way for those on the other side who can avoid damage at lower cost.

However, as I noted in my previous comments, according to Wikipedia, the Price-Anderson Act is built with a mechanism that requires Congress to pay the difference between the limited liability of the nuclear power industry and the total cost to people surrounding the reactor. Or if Congress fails to do so, under the Price-Anderson Act, people may sue the federal government under the Tucker Act, which apparently removes the federal government claim of sovereign immunity.

So the neighbors of the plants are indeed--at least in theory*--able to recover full damages.

*P.S. As noted by the eternal sage, Homer J. Simpson, "In theory, communism works. In theory." (I wouldn't want to be a person trying to recover damages after a nuclear accident.)

RAD writes:

I think my argument is that the nuclear accident scenario demonstrates that:

1. The risk assessment is the critical factor for making a limited liability case and everything we thought about nuclear accidents was spectacularly wrong, black-swan/fat-tail wrong, and simultaneously overestimates and underestimates.

2. The impacted region is not localized nor predictable so it is unlikely that land use decisions based on wind direction/speed, accident risk, and limited liability enters the mental calculus and if it does it's a wild guess as best.

3. It turns out that unseen but well understood risks like radiation and toxicity are not assessed rationally by people (zero risk tolerance) and this drastically changes the calculus.

Therefore, I am skeptical of any predictions about the impact of limited liability policy in the complex nuclear accident case. We don't understand the likelihood of failure, the modes of failure, nor the psychology involved in weighing known risks in this case. Same conclusion (I think), limited liability is bad, but different reasons why.

BC writes:

I agree that there is a Coasean result here, but I don't think it means that limited liability is more efficient than full liability. I think the result is that liability has no impact on efficiency but does impact wealth distribution. (Isn't that how the Coase theorem works?)

Let P be the value of the power plant, S the value of developing the surrounding land with no power plant, and D be the decrease in value of the surrounding land if there is a power plant. Think of these as present value of all future cash flows. (P is present value of power plant cash flows, D is present value of future damages, etc.)

First, consider the case where the same entity owns both the plant and surrounding land so that all costs and benefits are internalized. Presumably, the owner will find max(P,S,P+S-D) and, respectively, (1) operate the power plant while leaving the surrounding land undeveloped, (2) shut down the power plant (or not build it to begin with) and develop the surrounding land, or (3) both operate the power plant and develop the surrounding land.

Now, what happens if the power plant and surrounding land are owned by different entities, both with full liability and zero liability? (Ignore partial liability for simplicity.)

Case (1): P is maximum, so P>S and D>S. With full liability, power plant owner will find it cheaper to just buy surrounding land for S and leave it undeveloped rather than pay damages D. With zero-liability, surrounding land owner won't develop land since S will be less than D. Thus, we get the same efficient result (operate power plant and leave surrounding land undeveloped), but liability determines whether power plant owner or surrounding land owner "loses" S.

Case (2): S is maximum so S>P and D>P. With full liability, power plant owner will shut down plant since it's worth less than damages D. With zero-liability, surrounding land owner will buy power plant for P and shut it down. In either case, the surrounding land gets developed and the power plant is shut down (efficient), but the surrounding land owner either gets S (full liability) or S-P (zero liability).

Case (3): P+S-D is maximum so P>D and S>D. In this case, the power plant remains open and the surrounding land gets developed (efficient). Liability only determines whether the power plant owner or surrounding land owner pays D.

So, liability impacts wealth distribution but not land use (efficiency). Is that a subsidy? There is a symmetry between the power plant and surrounding land. (Think of D as the "loss" arising from operating the plant and developing surrounding land together rather than framing it as the "damage caused by the plant to the surrounding land". Choosing to develop land near a power plant can be said to "cause" the damage as much as the power plant can be called the cause, which I think is Zycher's point.) I think many people, though, would be tempted to accept the framing that the power plant is "causing" the damage and, thus, the loss "should" be borne by the power plant owner.

People might be pursuaded to look at it differently, however, if the surrounding land owner were less sympathetic, say an office park for hedge funds and Donald Trump's campaign headquarters, and the power plant owner were more sympathetic, say a non-profit providing free electricity to low-income, transgendered, Muslim, immigrant women of color. In that case, some people might ask, "Why should those poor customers have to pay more for electricity just so Donald Trump can locate his headquarters near a hedge fund?" :)

One can argue that there is no truly objective way to determine what the "right" wealth distribution is. Also, one can think of partial liability as a compromise in wealth distribution between zero and full liability.

BC writes:

I guess I disagree with Zycher. His claim is that full liability encourages people to over-develop land near nuclear power plants. However, when it's inefficient to develop land near a power plant (Case 1: D>S), then the power plant owner can just buy up the surrounding land and leave it undeveloped rather than pay future damages. When the surrounding land value is greater than the future damages (S>D), then it's efficient to develop the land.

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