It comes from who else but Arnold Kling. It is worth reading throughout, but his most important point is something I tried to get at here, which is that ex post failure does not imply ex ante wrongdoing. Kling, as always, says it clearest:
Therefore--and this is quite counterintuitive--one cannot necessarily conclude from the fact that there was a spill that not enough was spent on spill prevention. I have not seen this point made in the coverage of the BP spill, although I missed a lot of the coverage because I was on travel.
Again, this probably seems counterintuitive. Most people would tend to view the fact that the spill occurred as evidence that not enough was spent on spill prevention. But we cannot really know that. Yes, I am sure that ex post there are specific things that would have been cost-effective at this specific well. But it could be that, ex ante, if you had identified things that could have been done to reduce spill probabilities throughout the gulf, including but not limited to the things that would have happened to have prevented this specific spill, the cost-benefit analysis would have said not to implement those steps.
Another way of saying this is that, just as in the case of steady leakage there is an optimal amount of leakage that is not zero, in the case of rare spills there is an optimal probability of large spills that is not zero. So, although it seems intuitive that this spill constitutes an economic failure (I do not call it a market failure, because government regulation was a major determinant of the investment in anti-spill technology), and that intuition may be correct, it is not something that we know with certainty.
I always think of a roulette wheel with 100-1 payouts. A typical wheel has 38 squares, so the odds of winning are 1:38. With a 100:1 payout, should you find such a wheel, you should park your keister at it and not leave until you can comfortably retire. However that being said, 37 times out of 38 you're going to lose at such a wheel. In fact, it would not be unusual to sit at such a wheel and lose 40 times in a row. A friend watching you who was not versed in statistics might warning you against playing a game where you could easily lose 40 times in a row. And if you did lose 40 games in a row, they would surely take your constant losing as ex post evidence that you should have heeded their warning. However this is a still a wheel with a very high expected return. As with oil drilling, ex post results do not in any way imply that your ex ante expectations were wrong.
It's an important point, and one that I would think the vast majority of people don't understand.
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