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Sunk Costs: Literally

By Chris | November 13, 2008

When the cost of maintaining a boat exceeds it’s value, owners abandon them. From MSNBC.com:

Unlike cars, wooden and fiberglass boats have virtually no scrap value. So rather than pay the high cost of hauling their boats to the dump, people ditch them or sell them for as little as $1 to anyone who will take them. The boats often break up and go under, or pass into the underground economy of nighttime scuttlers— who, for a fee, remove traceable identification numbers, strip out salvageable items and sink the vessels.

In Georgia, Charles “Buck” Bennett, a natural-resources enforcement manager for the state, regularly finds wooden shrimp boats run aground and left to break apart in the Atlantic Ocean swells.

“I’m not an economist, but when putting 500 gallons of fuel in a shrimp boat costs more than the boat is worth, that is a sad thing,” Bennett said.

Bennett keeps a growing list of broken down boats slated for removal, currently 152 statewide. But with lean economic times and a declining shrimp industry, he guesses there are hundreds more hidden along the state’s shoreline and waterways.

“Oil, gasoline and sewage from these boat leaks into the aquatic environment,” said Sejal Choksi, program director at San Francisco Baykeeper, an environmental organization. Boat paint often contains chromium, lead, mercury and other toxic chemicals, and as a vessel deteriorates, the coating flakes off and settles on the sea floor or river bottom, where fish swallow it, Choksi said.

Government officials and environmental groups are calling for more programs and funding to prevent and clean up the junkyard flotillas.

But removing just one sunken sailboat can cost upwards of $12,000, and taking away larger commercial vessels is even more expensive.

I liked this article, because it illustrates that firms will shut down when they can’t cover their variable costs. Moreover, many of their initial fixed costs are sunk. It also is a good example of negative externalities. “Sunk” boats pollute the environment and may endanger others.

How can states deal with this problem? Well-meaning environmentalists and government officials pushing for more clean-up programs are misguided. The problem won’t go away unless you can change the incentives of boat owners. I would suggest a tax on boat sales to finance a boat buy-back program. Owners could recover the deposit they paid on their boat by returning it to the government when it was no longer operable. The program would be similar to the soda can tax and recycling schemes used in some states. In Michigan, “People return 97 percent of the 5.5 billion cans and bottles for which they pay a deposit”. Boats would no longer be “sunk” if they could be sold to the government for a few hundred dollars. It might also be productive to increase the penalty for abandoning a vessel.

Topics: Economics, Environment, Markets | 4 Comments »

4 Responses to “Sunk Costs: Literally”

  1. laura Says:
    November 15th, 2008 at 12:39 pm

    Interesting.

  2. frankie stix Says:
    December 13th, 2008 at 1:43 am

    random

  3. Justin Danner Says:
    April 9th, 2013 at 10:15 pm

    Apple gets about Wikileaks from the App Store

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