Why Power Companies Build Nuclear Reactors on Fault Lines: The Case of Japan

Abstract

On March 11, 2011, a magnitude 9.0 earthquake and 38-meter tsunami destroyed Tokyo Electric's Fukushima nuclear power complex. The disaster was not a high-damage, low-probability event. It was a high-damage, high-probability event. Massive earthquakes and tsunami assault the coast every century.

Tokyo Electric built its reactors as it did because it would not pay the full cost of a melt-down anyway. Given the limited liability at the heart of corporate law, it could externalize the cost of running reactors. In most industries, firms rarely risk tort damages so enormous they cannot pay them. In nuclear power, "unpayable" potential liability is routine. Privately owned companies bear the costs of an accident only up to the fire-sale value of their net assets. Beyond that point, they pay nothing -- and the damages from a nuclear disaster easily soar past that point.

Government ownership could eliminate this moral hazard - but it would replace it with problems of its own. Unfortunately, the electoral dynamics in wealthy modern democracies combine to replicate nearly perfectly the moral hazard inherent in private ownership. Private firms will build reactors on fault lines. And so will governments.

JEL Classification: H23, K13, K23, K32