Adair 1

Chelsea Adair
Professor Holland
ECON 1010-002
April 22, 2015

Deepwater Horizon Oil Spill

and Economic Principles

Adair 2

On April 20, 2010, an oil rig in the Gulf of Mexico exploded and sank. Following
this, an oil gusher on the ocean floor flowed into the surrounding water for almost three
months, causing environmental pollution and killing marine wildlife. Beyond the ecological
damage, human industries that profited from the harvest or sale of seafood were also hurt.
Seafood restaurants in Louisiana, for example, have been feeling the negative effects of the
spill for years now as prices for seafood to supply their restaurants have gone up as the
seafood harvest sizes have decreased. Compounding problems for these restaurants, demand
from customers for seafood at restaurants has been down as people have shied away from
eating seafood from the polluted waters. Analyzing the results of the oil spill, we can see
some economic principles at work.
The oil spill is an example of a market failure, or more specifically, an externality.
A market failure is when market activity fails to yield the optimum outcome for society. This
can be seen in BPs decision to cut costs and use a cement on the well that turned out to be
defective; BPs profit- and self-driven choices led to negative effects for society at large. The
unfortunate consequences of the oil spill are also an example of an externality. This means
that the costs of a market activity were borne on an uninvolved third party (meaning neither
the producer nor consumer), and this is seen in the environmental pollution and the loss of
business and profit for seafood restaurants as they now face higher seafood prices for
supplying their restaurants, as well as more reluctant customers wary of potentially pollutantlaced food.
Economic principles of supply and demand can also be seen in the consequences
and resulting behavior of those seafood restaurants. As pollution killed and stunted populations
of commonly harvested sea creatures such as oysters or crabs, smaller harvests and thus a
smaller available seafood supply resulted. As seafood restaurants faced continued customer

Adair 3
expectation of seafood menu items, these restaurants had a continued need to buy seafood to
supply their restaurants. This put the harvesters in a position where putting in the same amount
of work to harvest seafood yielded less of it, while the restaurants continued to be willing to
buy it (albeit possibly not in the same amount). This lead the harvesters to increase prices, and
causing the supply curve of the seafood harvesters to be shifted to the left.
This change in seafood prices for restaurants also then affects the restaurants
willingness to buy and supply their own customers with seafood. According the Law of
Demand, restaurants would now be less willing to buy as large of quantities of seafood when
prices are higher. This means the equilibrium price between the harvesters (the suppliers in this
instance) and the restaurants (the consumers in this instance) would move up on the supply
curve, meaning less seafood will be supplied for a higher price to the restaurants.
Restaurants supply decisions face an additional factor resulting from the oil spill,
which is reduced demand for seafood from customers. This is an example of a non-price factor
in demand, meaning that customer demand for the product (seafood) has changed because of
factors that are not price-related. Instead, these customers decreased demand for seafood is
based on expectationthey expect that if they consume the seafood, there is a possibility of
consuming pollutants and potentially facing health consequences for it. Thus, the demand
curve of the customers for the restaurants food is shifted to the right, meaning that it would
now take a lower price to tempt them to consume as much as before.
This leads to a final example of economic principles at work, which is economic
cost. As the restaurants costs go up and profits go down, there is increased economic and
opportunity costs as they continue to run their businesses. The restauranteurs must now
consider if their resources are best being used to their best economic advantage; is it worth
their time, money, labor, entrepreneurship, and other resources to continue to run their
restaurant rather allocate those resources elsewhere and pursue another way to make income?

Adair 4
Even if the restaurants are still managing to make a profit, they may be losing in economic
costs by not allocating their resources to a different endeavor that could return better profit.
Thus, it is possible the restauranteurs may choose to leave their restaurants or possibly at least
switch to more non-seafood items on their menu.
In conclusion, an economic system has interconnected parts, and the activity of
one business (such as BP) can very well easily end up affecting the business of another (like
Louisianas seafood restaurants). Economic principles affect our everyday lives; from the
amount we pay at the gas pump, to the safety of the food we eat, to the health of our natural
environment, to our own health, and so on. This certainly brings up questions such as how we
should go about trying to prevent market failure, and what role government should play in
regulating market activity. In the end, one thing is certain: market activity and economic
principles affect all of our lives, and gaining understanding of how they work also brings
greater awareness of how we are affected everyday by the economic decisions made in our
country.

Adair 5

References:
Moskowitz, Peter. Louisiana five years after oil spill. The Guardian. Guardian News and
Media Limited. 18 April 2015. Web. 21 April 2015.
Kaplan-Levenson, Laine. Appetite For Gulf Seafood Is Back, But The Oysters And Crabs
Arent. NPR. npr. 20 April 2015. Web. 22 April 2015.
"Deepwater Horizon oil spill of 2010." Encyclopdia Britannica Online.. Encyclopdia
Britannica Inc., 2015. Web. 22 Apr. 2015