Bush Urges Funding for Alternative Energy

In the Washington Post there is a news article describing the President's speech yesterday:

"Democrats and some Republicans criticize the Bush energy plan as failing to sufficiently address a leading cause of U.S. dependence on imported oil: the fuel efficiency of cars, trucks and sport-utility vehicles. Under pressure from struggling U.S. automakers, which are losing ground to foreign competitors and shedding jobs at plants throughout this region, Bush has not proposed large increases in the gasoline mileage that U.S. automakers are required to achieve, known as corporate average fuel economy (CAFE) standards. Bush has supported slight increases for some light trucks and SUVs but stopped short of across-the-board changes advocated by many lawmakers and environmentalists that could significantly reduce oil consumption.

[ . . . . ]

As Bush spoke, crude oil prices rose as a result of rebel attacks in Nigeria that reduced output by Africa's largest producer, underscoring the volatility of the oil market. "Some of the nations we rely on for oil have unstable governments or fundamental differences with the United States," Bush said.

What government can control is the incentives it offers -- through tax breaks and direct investment -- to companies to produce new energy sources and energy-efficient products and to consumers who use them. The president's new budget calls for increased funding for research into new forms of ethanol production, hydrogen and hybrid technologies that reduce fuel consumption of automobiles by using electrical battery power to supplement gasoline. Bush said the nation is on the cusp of technological breakthroughs that will "startle the American people."

This is one area where there is broad bipartisan agreement in Washington, though regional concerns often complicate discussions over how much to spend on various new technologies. Midwestern lawmakers, for instance, often push for large tax breaks for ethanol produced from the corn grown in the region at the expense of investment in hydrogen or solar power. Bush said lawmakers should come together to boost energy incentives this year."

There are some issues suggested here that I think we should consider for the term project.

First, there is a reference to increasing the miles per gallon goals of the CAFE. Many people discussing energy and environmental policy place great emphasis on CAFE. How do you see CAFE from an economic point of view? Is the CAFE policy consistent with market failure? Is the CAFE policy consistent with well targeted policy to correct market failure?

Second, notice the reference to policy approaches that involve subsidies in some form. Take a look at some of the specific activities the President is talking about subsidizing. Do you think it is likely there are positive externality market failures that would be corrected by subsidizing such activities?

Third, note also that the President seems to motivate his discussion of the proposed policies as a concern for the relationship between "dependence on oil" and the country's national security. Is this concern consistent with a market failure? Is national security a public good perhaps? Even if the activities that are suggested for receiving subsidies do not directly seem to involve positive externalities, would this attention to national security concerns still provide a market failure justification for such policies?