The Negative External Incidental Costs
It can be said that current related studies pertaining to the frameworks and methodologies for determining the costs of negative incidents have been more extensive. The recent year’s turn of events manifested that not all estimates for externalities had fully measured-up to the actual costs of failed projects and ventures. The inference that can be derived from this is that decisions were based on net increments, which did not explore the full scope of the risks involved.
An example is the British Petroleum (BP) Oil Spill in the Gulf of Mexico in 2010, for which the petroleum company’s liabilities amounted to $90 billion against their $104 billion equity. The extent of damages the company had to pay included:
- General liabilities
- Property Liabilities
- Workers’ compensation
- Cost of clean-up materials, technology, transport, communication and other necessities.
- Compensation for the clean-up workers including the treatment of possible effects to their health
- Reimbursement for tainted food and crops including the marine products that could have provided livelihood to the community fishermen
- Destruction of the ecosystem not only to the gulf, but also to the marshes, swamps and rivers whose bodies of water were tainted with oil spills
- Environmental liability
- U.S. Longshore and Harbor liability
- Negligence and criminal wrongdoing
- Willful violations of the Occupational Safety and Health Act (OSHA)
Moreover, the externalities affected several insurance companies since they had to satisfy numerous insurance claims for individual damages.
These examples had beset an oil company at far greater costs than its estimations. Environmental liability, for example, included the number of migratory birds that annually visited the shores after a long migratory travel. The liabilities likewise took into consideration the drop in the number of tourists that trekked to the region, and the lost income of the businesses that depended in the region’s tourism industry.
Other examples of large-scale side effects include those that affect financial institutions, inasmuch as their failed ventures can ripple through a nation’s entire economic condition. Iceland, for example, declared a state of bankruptcy in 2008 after three of its major banking institutions collapsed.
In recent years, financial institutions like Goldman Sachs, JP Morgan Chase, and Citibank have received government financial assistance since the extent of their failed investments could have driven a greater number of businesses into bankruptcy during the height of the 2008-2010 economic crisis.
On a much smaller scale, incidental costs can be exemplified by the decrease in income generated by a branch or unit in the event that another branch is set-up as a strategic move for providing better customer service. A product innovation can also affect the sales performance of an existing product if the new item is regarded as more economical albeit inferior in quality.
Perceive that the call for placing further emphasis on paying attention to externalities is not only for its significance in estimating the potential net increment of a project. If for purposes of risk assessment, the said concept will be confined to what was considered in the cash flow estimation, the management of possible threats or risks surrounding the project will therefore be limited.