Tuesday, April 25, 2006

Gas price policies

A couple of weeks ago, Ben Lieberman over at the Heritage Foundation analysed some proposed suggestions to the increase in gasoline prices. Lieberman did his analysis from a framework of what is cheaper for consumers, so I decided to see analyse his analysis from an efficiency perspective.

Point one - expand energy production at home

When economists talk about expanding production at home, we are talking about subsidizing an industry. This would be bad from an economic perspective since there are no positive externalities associated with energy production. However, Lieberman is not talking about government doing more to lower prices, as subsidies would do, but he is instead talking about it doing less. He points out that when prices were cheap, government banned drilling in ANWR and offshore sites. Such a ban cannot satisfy efficiency. It ignores the fact that producers could get oil out of the ground for cheaper than the market price; if they couldn't, such a ban would be pointless. Since there is no efficiency reason for government to be involved, externality, monopoly, or public good, then it would be more efficient for government to do less.

Point two - deregulate

Lieberman's second point is that deregulating the production of gas from oil would lower the price of gasoline. These regulations are command-and-control regulations that serve no efficiency purposes. They are attempts at protecting the environment, but if there were reasons to do so that the market was failing to account for, and again this would require a monopoly, externality, or public good to exist, then measures could and should be taken to fix the market failure and make things more efficient. However, the argument for market failure usually centers around the possibility of externalities (aesthetics, health, etc.), so the only government intervention that might be more efficient would be subsidies and taxes, not regulations. Lieberman's proposal of deregulation would not only lower gas prices, but would also be more efficient.

Point three - don't raise taxes

Lieberman also pointed out that a couple of politicians proposals that would increase the price of gasoline. The first is to raise taxes. Tax increases have been proposed for various reasons, including to reduce consumption of gasoline or purely because they don't like how much money oil companies are making. While Lieberman is right that it would increase gas prices, a tax on gasoline may be legitimate if negative externalities exist for the use of gasoline, such as pollution (and current taxes don't already fix those externalities). However, raising taxes simply because a company has profits is rediculous. There is no externality for profits, and the motives are pure envy, not efficiency.

Point four - no additional regulations

Lieberman also suggested consumers would be hurt by more regulations. The regulations being considered include forcing automakers to make more fuel-efficient cars. Fuel-efficiency is not a public good and no one has a monopoly on fuel-efficiency or anything related to it, so these regulations must be inefficient. Even if their was a market-failure, it would be an externality, so forcing politicians' will on automakers would not achieve efficiency.

Lieberman wasn't directly using efficiency as a framework for analysing these policies, but his framework is similar, and I wonder if he had efficiency in the back of his mind. He may have been thinking of the efficiency framework, but using the "consumer" framework so that everyone could relate better. Either way, the conclusions of the two frameworks are quite similar if not the same.

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