Market Failure

The article I chose is a combination of the article from the Wall Street Journal and a response to the article. The article is from August 2, 2010 and deals with the BP oil spill in the gulf. The main connection between the article and our macro-economics class is a market failure. The definition for a market failure is an imperfection in a price system that prevents an efficient allocation of resources. The democrats in our government are purposing to remove the 75 million dollar cap that is on the cleanup fund for the gulf. They are purposing to make the amount of money spent for the cleanup efforts infinite. A republican senate member, Mr. Reid (his full name was never given) strongly opposes this ridding of the cap. Reid purposed a bill that in effect would make it so small to mid-sized oil companies could not drill in the gulf. Reid’s bill makes the government responsible for cleanups over a certain size. It also makes insurance very hard to get because the prices would be so high. So only large oil companies would be able afford the insurance when a small company could have a flawless safety record and not be approved.
This is a market failure because if the market cannot work the way it should, which would mean the insurance companies would approve the companies worthy of insurance. Then there needs to be some form of government intervention to solve the issue. I think that the market should be able to correct this market failure on its own though.
I think that insurance companies should be able to handle picking companies no matter how small or large and see their safety records and be able to determine who they can insure, and for what price. If insurance companies are able to do that there is no need for government intervention. So in conclusion I think that if this bill proposed by Reid is passed it will create a market failure and complicate things that do not need to be tampered with. But I do not believe that the senate should remove the 75 million dollar cap that has been put on the cleanup effort in the gulf. It is a tough situation for government officials to figure out.

http://www.tnr.com/blog/jonathan-chait/76713/the-wsj-edit-page-discovers-market-failure