The BP Oil Spill prompted brilliant libertarian legal theorist Richard Epstein to remind us that the problem isn’t regulation, it’s government limits on liability (see op-ed at the Wall Street Journal). Big Business doesn’t mind regulation, as long as it can put caps on it’s liabilities (see “Too Big to Fail” … )
A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don’t get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate.
In an environment of unlimited liabilities for harmful externalities, insurance would be a must, and insurance companies will be far better regulators than the government. After all, the government employee gets paid the same amount of money with the same amount of (never-ending) job security whether he actually assesses risk correctly or not. The insurance company? One wrong risk assessment, and it’s in the breadline.