Sunday, April 5, 2009

You Always Hurt The Ones You Love

I often write of the unintended consequences of government intervention in markets. Most of these unintended consequences stem from regulations (or selective de-regulation) that results in a government putting its thumb on the scales of the market, and distorting real prices. The general mechanism is as follows:

1) Price is determined in the market for a given good.

2) The price for this good is too high for some people to pay.

3) The government wishes these people to have that good as well, and creates a subsidy for these people to acquire the good.

4) The price of the good rises, because it is guaranteed a market based on the subsidy, establishing a new, higher, baseline price for the good.

4a) The more desirable the good, the more likely it is that the increase in price will match the increase in subsidy. Thus pricing more people out of the market for it, and creating more need for government subsidy.

5) Go to step 1.

---They Can Have Any Color They Want, So Long As It's Green---

Michael G. Franc tipped me off to March 30th's Dept. of Transportation press release:
U.S. Secretary of Transportation Ray LaHood announced today that the Department of Transportation has posted the new fuel economy standards for cars and light trucks for the 2011 model year…

On January 26, 2009, President Barack Obama directed the Department of Transportation to review relevant legal, technological, and scientific considerations associated with establishing more stringent fuel economy standards, and to finalize the 2011 model year standard by the end of March.

He goes on to quote the Detroit News:
Stricter fuel economy standards….for the 2011 model year will cost struggling auto companies nearly $1.5 billion and boost the cost of passenger vehicles an average of $64 for cars and $126 for light trucks.

The National Highway Traffic Safety Administration said the additional vehicle cost will be recouped by buyers of pickups, SUVs and minivans, through fuel savings, in an average of 7.7 years. Passenger car buyers will recover that cost in an average of 4.4 years.

In a recent post I ask if consumers really will recoup these costs? I don't think so. It is more likely that the price of gasoline will rise to make up the ground we "gained". Remember that oil production is largely controlled to match an acceptable level of profit for oil companies. To many of us, however, the amount of gas we consume is largely a fixed cost (see step 4a), and can't be easily adjusted without purchasing yet another car.

Go to step 1.

How many times do we have to watch this cycle repeated, from college tuition prices, to health care costs, to energy prices? Even when our hearts are in the right place, we're hurting the very people we are trying to help the most when we close our eyes and try to wish away the laws of supply and demand.

No comments:

Post a Comment