Wednesday, July 26, 2006

Just Get Prices Right...

People don't like scarcity. Resources they like should be available in infinite quantity at a zero, or an "affordable" price.

Me, I don't like gravity. Let's legislate that away. I'm 6'1". I should be able to dunk. Sure, I'm fat and out of shape. But the REAL problem is physics. As Sinead said: "Fight the real enemy!", in this case: gravity. I'm being denied an important civil dunking right here. There ought to be a law.

Okay, gravity is a physical law, not a statute. But we have no more chance of solving the problem of scarcity by outlawing it. Reminds of Winnie Churchill's line: You can't promote peace simply by praising its virtues. You can't promote cheap, infinite supplies of stuff simply by saying how nice it would be if we had cheap, infinite supplies of stuff. Even though it's true that it would be nice.

But if you allow markets to work properly, you can get lots more stuff, and lots cheaper stuff.

Take electricity....please. We cap price, give producers incentives to pad their rate base with nonproductive assets, and then whine when we run short. Sean at Catallarchy makes a nice comparison: what other business tries to tell its customers to use less of its product?

The solution is to let electricity producers price discriminate, by time. If they could charge the full marginal cost to customers, then peak load problems go away. Yes, lots of people might go without AC, but they wouldn't leave their AC running because the cross-subsidized rate is too low to make them care.

And, if prices could rise to their market-clearing level, all those other technologies that tree-hugging bed-wetters love so much (solar, geothermal, squirrels on little wheels hooked to generators (unless this happened), generators run by violent wave motion in my waterbed, etc) would actual become economically feasible. Charging the market price for electricity is the best thing that could happen for the environment.

Just get prices right. Everything else falls into place without direction, or orders from the nanny.

UPDATE: To RL in Canadiana...we subsidize GASOLINE even more, pumpkin. We would have electric cars in just a couple of years if we charged market prices for gas. But we don't. It wasn't the automakers who killed the electric car, they just pulled the trigger. Our tax policies and foreign policies, the ones that keep gas prices at least a dollar or more below the true price...that is what aimed the gun at the electric car and cocked it. Why would you blame corporations for trying to make profits? It's what they do. But when government enables corporations to misuse market power, because the UAW is such a strong voting bloc in a few states, and because oil companies make big contributions....just get prices right. If gas prices rise to their natural level, consumer demand for electric cars will overwhelm automaker opposition. I'm not sure why CNN got that so wrong. Wait...I am sure. They have no clue about how markets work, and they love the nanny.


Anonymous said...

Funny, my wife was just hoping for a squirrel-driven type self-perpetuating car!

I think the question remains, who killed the electic car?? If there was a free energy market, could I buy a RAV-4 like the brainy lifeguard on Baywatch and run all my errands after plugging in the car every night?
See CNN Story here

Dirty Davey said...

As Sean suggests, this would also require a system in which the customer had the choice of multiple electricity producers and the ability to change producers--based on the current rate--fairly easily. Or at least some alternative to the current monopoly producer system.

Otherwise you have the California situation--incentive for a monopoly producer to reduce capacity and increase profits from the resulting shortage.

I suspect that the power companies actually prefer price regulated monopolies to facing real price competition.

(Regarding the subsidy for gas--I'd argue the entire cost of the Iraq misadventures should be covered with a dedicated gas tax. Were it not for the oil, we wouldn't have been there in 1990-91 and wouldn't be there now.)


Anonymous said...

_My_ gas is not so heavily subsidized. Thankfully, my ethanol is even less heavily subsidized, so my candy bars taste better since they are made with more sugar than corn syrup... Yet our roadways are worse. So, yes, no one but the consumers killed the electric car. Fortunately, they may be taking GM down too.

The gas prices, btw, in Canadia change every few hours by a few cents a "litre". Two weeks ago, we pulled into a station and by the time I got the plastic out of my wallet, the price had dropped 4 cents a litre. Yeah, about 15 cents a gallon... It appears that the prices are cheapest between 8 and 10 pm. And there are frequently lines at the stations at those hours.

But like a ray of light, perhaps my prayers have been answered - See USA Today. If I hit the lottery, I can buy an all-electric sports car.