The wreck of the Costa Concordia off the Italian coast spotlights key issues in the never-ending debate about whether government regulation of private economic activity is necessary and about its costs and benefits.
Tragic as this incident is, loss of life in passenger ships is exceedingly rare, especially in contrast to a century ago. So it may not prompt the same calls for new regulation that the sinking of the Titanic did in 1912. But issues of safety at sea provide an interesting lens through which to view debates about public regulation.
Well into the 19th century, there was little call for such regulation. This was due in part to passive acceptance that seafaring was dangerous. Moreover, traditional principles of laissez faire economics predominated, including a belief that markets automatically provided incentives for safety.
Sinkings were so common in the mid-1800s that often a thousand British seamen died each year, often because ships were overloaded. A coal merchant and member of Parliament named Samuel Plimsoll advocated regulation in the form of lines painted on ship hulls indicating how deeply a ship could be loaded safely. One can still see these “Plimsoll lines” on the bow of any ship. But although he got a law passed in 1876, it was not until 1890 that it gained enough teeth to be effective. The incidence of ships foundering at sea dropped.
About the same time, the British Board of Trade began to require lifeboats and life preservers on passenger ships. But the requirements did not keep up with enormous increases in ship size. The Titanic was only one of several sinkings in which too few lifeboats increased the death toll.
However, the Titanic tragedy motivated international safety agreements.
Regulation has always been contentious, however. And the economic arguments have remained essentially the same for more than a century.
The first argument of opponents is that ship owners will take safety measures to prevent the loss of their property. The counterargument is that competitive pressures force them to skimp on safety. Moreover, the pooling of risk through insurance means that owners face only partial losses. And the lives of the owners themselves seldom are at risk, since the day when the ship’s captain often was the owner are long gone.
A second argument was that free-market forces would motivate insurers to charge higher premiums on unsafe ships and offer lower ones on safe ones. This would motivate owners to spend on safety measures. This did occur, but studies repeatedly showed that the “transaction costs” of frequent ship safety inspections by insurers were such that many paid little attention to this in setting rates.
A third argument was that both passengers and shippers were willing participants in a market transaction. If they valued safety of their persons or cargo, they would choose ships that offered more safety. They would be willing to pay the higher costs necessitated by greater owner spending on safety. If they chose to travel or ship cargo on unsafe vessels, that was their own satisfaction-maximizing choice.
The counterargument is that there is an “information problem” in that most customers don't have the information to discern which ships are safe and which are not.
And here, modern behavioral economics adds another twist, that humans are not rational in assessing risk and tend to overestimate some risks and underestimate others.
When concerns, such as Plimsoll’s, were primarily about crew safety, regulation opponents made a parallel argument that crew members were willing participants in the transaction. And higher safety spending would increase costs and reduce jobs in the shipping industry. Moreover, seamen earned more than landsmen, just as coal miners earned more than other workers. This “compensating differential” for dangerous work, they argued, was an automatic market response that fully compensated willing individuals for taking risks.
Until shipping petroleum in large quantities became common, there was little discussion about shipping’s effects on third parties. Now pollution damage is the central issue in shipping safety. Economic theory is clear that some government response is needed.
Libertarians argue, however, that this can be limited to an efficient legal system in which those causing harm can be sued for damages. The threat of such suits will motivate tanker owners to take safety measures.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
