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Environmental Cost of Leaking Chemicals

You are a manager of a chemical company. An accident has occurred in which chemicals leaked into the ground water nearby. The community is unaware of the accident.
1. Compare the primary costs involved in cleaning up the water immediately (and thus confessing) versus hiding your culpability now and possibly paying more in the future.
2. Predict the impact on profitability in both situations. Justify your response.

Solution Preview

1. In the context of cost, you have two choices:
(a) confess and pay the cleaning cost; and
(b) do not confess and no cleaning cost required.

For situation (a), it is clear that you have to pay the actual direct cost involved in the cleaning.

For situation (b), you will face two possibilities on what will happen. First, the authority will eventually find out about the leakage and you will be fined. In this case your direct cost will be the fine that you have to pay. Second, you get away ...

Solution Summary

Chemical spill committed by firms maybe costly for initial cleaning. However, the firms will gain public trust for this heroic action of confessing and take the responsibility to remedy the situation. In the long-run, the firms in this situation will gain despite the heavy initial cleaning cost. On the other hand, if the affected firms try to avoid taking responsibility, they may have to pay higher cost in the future in the form of fine, litigation cost, tax and negative goodwill. Therefore, in the long run their profits will be affected.

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