Saturday, August 02, 2008

Government Intervention in Energy Markets and the Crowd Out Effect

If government could pre-commit to never get involved in regulating any energy market, how much more energy efficient would our economy be right now? Do you need a Big Daddy government to protect you from the law of supply and demand in energy markets? Is demand for energy really price insensitive in the short run? If you knew that price spikes had a positive probability of taking place, would you have a backup plan ready to help you adapt when prices soared?

"Consumers have the ability to make wise decisions if they face prices that accurately reflect costs. Firms have just as much ability to innovate in ways that will attract thrifty buyers. High prices may be painful, but they convey a key nugget of information: Energy is scarce; use it wisely. If the government uses tax policy to artificially reduce energy prices, then the government will only deter private individuals from appropriate conservation."

Edward L. Glaeser, a professor of economics at Harvard University, is director of the Rappaport Institute for Greater Boston

I agree with Glaeser. Purchases of "green" durables would be much more likely in a world where people anticipate that they must protect themselves from energy spikes. Moral Hazard lurks again. Government is crowding out individual incentives to invest in energy efficiency.

Right now, I'm living a small footprint lifestyle in Berkeley, California.
5 of us are living in a 1 bathroom house. You are welcome to join us. I'm ready for the price spikes. Are you?