The Knowledge Problem
Commentary on Economics, Information and Human Action

Tuesday, September 30, 2003  


The two most recent posts there are quite entertaining and pithy. First, in commenting on the tedium and general lack of editing in the LOTR films, Alex Singleton observes

Yet the Lord of the Rings films have netted lots of money. Bad films, making lots of money. Is this an example of market failure?

Well, no. Because lots of people really like the movies. An important part of the free-market economy is that it recognises that different people like different things. Instead of a bureaucrat - who "knows best" - deciding what people will like, it lets individuals themselves make their own choices. And that is a wonderful thing.

Hear, hear! Now it's my turn to try to encourage those bureaucrats that they don't know what's best for others in electricity.

And Masden Pirie's post about Arnold Schwarzenegger, including a link to an article on the bet he placed a while back:

Madsen Pirie, the president of the Adam Smith Institute, is feeling pretty smug. Three years ago he wagered £100 at 25-1 on Arnold Schwarzenegger becoming the next governor of California.

posted by lkkinetic | 9/30/2003 03:28:00 PM


Is reading David Hume. From his essay "Of the Jealousy of Trade," (1759):

Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expence. In opposition to this narrow and malignant opinion, I will venture to assert, that the encrease of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours; and that a state can scarcely carry its trade and industry very far, where all the surrounding states are buried in ignorance, sloth, and barbarism.

posted by lkkinetic | 9/30/2003 03:17:00 PM

Monday, September 29, 2003  


This week Newsweek has an intelligent article on experimental economics and its value in application to real-world problems. It starts with a profile of Vernon Smith and the work he pioneered that won him the Nobel last year, and illustrates the origins of experimental research:

Smith did not set out to bring down the establishment. Back in 1956, when he was a young professor at Purdue University in Indiana, economists took certain assumptions as fact. One was that markets can’t reach “competitive equilibrium,” the point where buyers and sellers agree on a set price, unless they are made up of an infinite number of players, each possessing perfect knowledge of the marketplace. In a bout of insomnia one night, Smith concocted a plan to demonstrate this notion by putting his students through a trading game. Buyers were given a maximum price they could pay, and sellers were given a minimum they could demand, for an unspecified good. Classical theory said that with such imperfect knowledge of the market, players could never agree on the best price. To Smith’s shock, the unwitting buyers and sellers agreed on the best price —after a few rounds of bidding. Smith was convinced he’d fouled up and kept running experiments to prove the old assumptions correct. He couldn’t. The field of experimental economics was born.

The article goes on to describe how experimental economics is a useful tool for business and for policy, from seeing how posted price rules affect consumer welfare to seeing the consequences of complex combinatorial auctions. A good profile, and a must read.

posted by lkkinetic | 9/29/2003 08:17:00 AM


I spent the weekend at a beach house in Michigan with my husband and six close friends, one of whom is a die-hard Cubs fan. She couldn't even listen to the second game in the same room with the rest of us on Saturday, but instead sat outside and watched the lake. Thankfully we had a bottle of cheapie champagne in the house that had been intended for mimosas on Sunday morning, so we could celebrate appropriately by hootin' and hollerin' and watching the live coverage on TV and drinking champagne.

And thanks to Stephen Karlson, for this Milwaukee Journal-Sentinel article highlighting the clinch, and the role that the Brewers played in ensuring it by beating Houston twice. We Chicagoans are truly grateful, and don't mind showing it:

Don't discount the costumed Italian sausage (really) parading on Waveland Ave., who carried a sign that said, "Brewers do their part to help Cubs."

Heck, even Andrew Sullivan's beau is in a trance over it (although the appropriate trance time would have been Saturday evening).

And how awesome is Dusty Baker? Boy, did he look like he was having a good time in yesterday's game, with the pressure off.

When the Cubs were in the playoffs in 1989 I lived in Evanston, not as close to Wrigley as I do now, so it will be interesting to see how nutso things get around here ...

Now let's beat those Braves and work toward that Cubs-Red Sox World Series!

posted by lkkinetic | 9/29/2003 08:03:00 AM

Friday, September 26, 2003  


On Wednesday Tyler Cowen raised the following points about Callum McCarthy's Financial Times editorial on the London blackout:

OK, the author is Callum McCarthy, chief energy regulator in the UK, and he presumably has a vested interest in defending the status quo. And I don't understand his convoluted take on overcapacity and price history, as I read McCarthy he is committed to both high and low prices at the same time, these equivocations make me more skeptical about his conclusions. Still, his perspective deserves wider circulation.

Tyler was kind enough to fax me the FT op ed so I could address his questions. McCarthy's argument starts with what he sees as three "urban myths" being tossed around after the hour-long blackout in London (during rush hour) a few weeks ago:

1. The cause of the London blackout was insufficient investment in the network, as a consequence of the regulator's price regulation
2. It used to be better when the power industry was nationalized, because we had plenty of overcapacity, so things like this didn't happen
3. The existing market institutions in England do not create the proper incentives for investment in generation capacity

OK, let's take each of these in turn; what follows will be an amalgam of my interpretation and what McCarthy said in his op ed.

1'. Since England privatized its electricity industry in 1990 and moved to price regulation, investment in transmission and distribution has been substantial (and, by the way, transmission costs and congestion costs have fallen). McCarthy argues that since privatization, GBP16 billion has been invested in England's transmission and distribution networks. National Grid, the publicly-traded firm that owns and operates the transmission grid in England, has a very informative website and has produced a report on the incident, the executive summary of which is very thorough and clear. National Grid is also subject to reliability performance regulation -- penalized for outages, etc. This style of regulation is in marked contrast to the U.S. approach, which is to mandate excess capacity margins, an input-based approach instead of an outcome-based approach, and one that I believe is decidedly inferior to England's outcome- and performace-based regulation.

As for price regulation's role in this -- England uses a method of regulation called RPI-X. Under RPI-X, the regulator sets a retail price target (RPI) and an efficiency improvement factor (X) for each retail distribution firm (of which I believe there are 9 in England and Wales). X is based on an analysis of a whole bunch of factors that could lead to the expectation of future cost decreases through efficiency gains, and is specific to each firm based on their market conditions, etc. Obviously, as McCarthy says in his op ed, the regulator has an interest in a low RPI-X, to keep prices low for consumers. But, also as McCarthy says (and this is where I think Tyler thinks that he equivocates), this is a tough balancing act for the regulator, who knows full well that an RPI-X that is too low will result in reduced reliability on the network.

So the job of the regulator is essentially that of a balancing act -- set a target RPI-X for each firm that confronts the firms with the proper incentives to reduce costs and invest optimally in reliability, yet gives the consumers value-for-money service. Thus McCarthy says in the op ed "Ofgem has been concerned to reward behaviour that meets consumer needs and ensures reliability."

Two interesting contrasts with U.S. utility regulation: first, we use rate-of-return (ROR) regulation, in which the utility is allowed to earn a particular ROR on its assets, not RPI-X regulation. ROR regulation is full of perverse incentives, the most famous of which is called the Averch-Johnson (A-J) effect, which is that utilities have an incentive at the margin to invest in more generation and transmission capacity because that's what their earning their ROR on. Direct evidence on the A-J effect is difficult to isolate, but the fact that most states in the U.S. that have pursued deregulation do so because they are paying for lots of expensive, unnecessary excess capacity is a piece of evidence that is consistent with the A-J effect. Second, regulators (all 51 of them in the U.S., as opposed to one in England and Wales) have different missions and legislative remits. In the U.S., regulators are charged to bring about outcomes that are "in the public interest", and most commissions interpret this remit as keeping prices low and stable for all consumers (even those who would be better off if they were allowed to take on some share of the price volatility risk, but that's another post ...). In England, Ofgem is charged with fostering and maintaining competitive wholesale and retail electricity markets, with one expected consequence of that being consumer benefit. But consumer benefit is not solely interpreted as low and stable prices for all consumers, as it has come to be in the 51 state regulators in the U.S.

2'. Spare me. As McCarthy says in his op ed, "the halcyon days when 'things were better' never existed. Since privatisation, the number of power cuts has fallen by 10 per cent and the duration of those cuts has fallen by nearly a third. Britain's electricity system is among the most reliable in Europe." The kind of overcapacity that Britain had under nationalization was just as expensive and inefficient as the overcapacity we've built in the U.S. through the A-J effects of ROR regulation. Excess capacity is neither necessary nor sufficient for reliability -- you can achieve reliabilty without having that huge and expensive generation capacity cushion, particularly if you take advantage of active demand response to create healthy, diverse retail power markets. England has done that. The U.S. has not.

3'. England's wholesale and retail power markets are integrated, and their RPI-X method of regulation does not interfere with the transmission of price signals from the retail market to the wholesale market and vice versa. Therefore, generation capacity goes online and offline to varying degrees depending on market conditions. Those who interpret the mothballing of generation capacity over the past two years, in response to low prices due to reduced demand, as a failure of England's electricity market to send investment signals do not understand (or willingly misunderstand) how investment in industries with fluctuating demand works. It's a pattern very similar to natural gas exploration and drilling that has been discussed before in these pages -- low prices make marginal generators unprofitable, so the owner shuts it down to save on variable costs. If the owner foresees a future increase in demand, the owner will choose to keep the unit, incur the fixed cost, but not operate it. If the owner does not foresee a demand increase that would make running that generator profitable, the owner will choose to sell the unit to someone whose expectations of future demand are more sanguine.

Indeed, as McCarthy states in his op ed, economic growth and expectations of future demand, signalled by increases in electricity futures prices (see how useful financial markets can be in this?), are leading generation owners to un-mothball some of their capacity.

Hope this helps ...

posted by lkkinetic | 9/26/2003 10:42:00 AM


As with almost everything that Jonathan Rauch writes, including this recent Atlantic Monthly article on genetically modified food, this National Journal article on dos and do-nots instead of haves and have-nots is utterly insicisive and insightful. He does a nice job of summarizing research on poverty that has moved beyond the convictions of the early 1990s that any attempt at a behavioral explanation for poverty was "blaming the victim", focusing on recent research from Isabel Sawhill and Ron Haskins of Brookings.

In their new paper, she and Haskins use detailed census data and statistical modeling to simulate what would happen if the poor worked as many hours as the nonpoor, at jobs matching the workers' actual qualifications. The result: Full-time work would reduce the poverty rate from today's 13 percent to 7.5 percent -- almost half. ...

The bigger surprise, however, was yet to come. Sawhill and Haskins then simulated a doubling of all welfare benefits, much more than anyone seriously contemplates. The result? Poverty dropped from 13 percent to 12 percent. The meter barely jiggled. Even a massive welfare increase would have less effect than any one of four kinds of behavioral change.

Very interesting findings. Thanks to
Eugene Volokh for the pointer, as well as for posting the Reason archive link to the article that will allow free access to it after October 1, 2003.

posted by lkkinetic | 9/26/2003 09:46:00 AM


We were sitting here last night, watching the USA-Nigeria game in the Women's World Cup, in which Mia Hamm played brilliantly:

Mia Hamm’s team mates have come to expect big games from her. But Thursday night’s performance in the USA’s 5-0 win over Nigeria was out of the ordinary even for the world’s all-time leader in international goals.

Meanwhile, Hamm's fiance Nomar Garciaparra hit a home run, had 4 RBIs, and helped the Boston Red Sox make the playoffs for the first time in four years. [Now if the Cubs hold on and make the playoffs, my dream of a Cubs-Red Sox World Series is still alive! ...]

The two have been engaged for almost a year.

I'm also spending quite a bit of time lately wondering how it is that the WUSA women's soccer league has gotten to the point where it may fold. So many girls play soccer, and professional soccer is such an inspiration for so many girls, that I wonder why they have not succeeded at attracting more advertisers and sponsors. I would have even placed their probability of success higher than the MLS men's league, because there are fewer substitutes for professional women's soccer.

There is no other country in the world that economically and culturally enables such striving and achievement through amateur and professional women's sports as the U.S., and I would hate to see this league fail. As an economist I have to say, if people don't value it enough that they are willing to pay for it, then so be it, but I wish there were more people out there with my preferences so that it would be more viable!

Here's a good article from last week from the Chicago Sun-Times on Mia Hamm, her fourth World Cup, and the potential demise of the WUSA.

posted by lkkinetic | 9/26/2003 09:31:00 AM

Thursday, September 25, 2003  


Hal Varian's Economic Scene column today is a very clear and succinct analysis of the dynamics underlying the current state of politics in California. His summary of the electricity crisis is pretty sound (although he does persist in calling what they did deregulation, which it was not). A highly recommended read.

posted by lkkinetic | 9/25/2003 04:15:00 PM

Wednesday, September 24, 2003  


With five games to go in the season, the Cubs are in first place in the NL Central. Who'd a thunk it?

Back in June, when we didn't fall prey to our usual "June swoon", people started saying things like "if we can just stay in the running until September, then we have an easier schedule than either Houston or St. Louis, so we can have an end-of-season surge". So far, that seems to be the case, and last night's Cubs victory over Cincinnati and Astros loss to San Francisco is an example of that.

I thought it was just usual Cubs fan excessive yet hopeless optimism, but ... we may actually do it! And on the back of strong pitching, no less. It's been a long, long time since pitching was the core strength of the Cubs. Trading for some good bats has helped too, and what's interesting to me about that is that two of the folks we got, Kenny Lofton and Randall Simon, came from the Pirates "we're not making the playoffs" fire sale. But since the trades the Pirates have been playing well over .500 ball! Talk about mutually beneficial exchange ...


posted by lkkinetic | 9/24/2003 10:17:00 AM


For economics commentary from a British perspective, check out the new Adam Smith Institute blog (with thanks to William Sjostrom for the pointer).

posted by lkkinetic | 9/24/2003 10:08:00 AM


Rick Mattoon of the Chicago Fed and I are the author's of the Chicago Fed Letter, October issue, and the topic is natural gas policy and implications for the Upper Midwest region. Regular readers of TKP and Tech Central Station are familar with my analyses of natural gas policy, and this letter reiterates some of it and combines it with valuable insights from Rick on the regional implications of high and/or volatile natural gas prices. One interesting thing you see in Table 1 is how much our region uses natural gas for home heating and cooking relative to the US average.

posted by lkkinetic | 9/24/2003 09:41:00 AM

Tuesday, September 23, 2003  


This BBC article describes a Shell oilfiled in Gabon where more wildlife congregates than in neighboring wildlife parks.

posted by lkkinetic | 9/23/2003 07:19:00 AM


Kudos to Kevin Brancato at Truck and Barter for his terse explanation of the broken window fallacy. I remember after the Mississippi River flooding in 1993, Bruce Babbitt saying something like "well at least the silver lining is that the destruction will create lots of work." I think I yelled loudly enough and long enough that my neighbors thought I had finally lost it. The broken window fallacy is a pernicious and illogical construct that needs to have the light of day shone on it so it goes scurrying back into the recesses of the brain like the conceptual cockroach it is.

UPDATE: By the way, terse is a compliment. Would 'twere that more people could communicate information effectively and tersely at the same time!

posted by lkkinetic | 9/23/2003 06:53:00 AM


At the Volokh Conspiracy, Juan non-Volokh has a good set of posts on the economic and political dynamics underlying criticisms of the recent New Source Review changes, which I discussed in this post.

posted by lkkinetic | 9/23/2003 06:44:00 AM


Future Pundit was full of all sorts of interesting news while I was gone, including this post on using bacteria to extract methane from coal (and a sidenote on carbon sequestration), and this post on new organic materials to make cheap solar panels. One remarkable thing to note in his discussion of the efficiency of energy generation from the panels is how low the numbers are for solar -- these panels are cheap and flexible enough that the researchers think they'll be commercially viable at 10 percent efficiency (right now they're at 3 percent). Typical silicon photovoltaics produce at about 24 percent, but they are expensive. For a frame of reference, coal-burning electricity generation is approximately 33 percent efficient. It would be a lot higher if we had more combined heat and power, but that's another topic ...

posted by lkkinetic | 9/23/2003 06:28:00 AM


10. Gorgeous weather -- dry, sunny, overnight temps in the 50s, daytime temps in the 70s and 80s.

9. Gelato -- ate some every day. The best quality and flavor combo we found was at a place in Florence called Vivoli, where we got the cioccolatta ricca (rich chocolate) and crema d'arancia (orange cream). We also had a good zabalione gelato in Lucca, and good hazlenut gelato mixed with chocolate in San Gimignano.

8. Pisa's Duomo and leaning tower -- boy, does it lean! Both have beautifully intricate marble carving on the exterior, almost lace-like. The tower is shorter than I expected, and at a very precipitous angle indeed.

7. Towers as shows of wealth and power -- San Gimignano is the best survivng example of this, with 13 of its orignal 72 towers still standing. Families built these towers not so much for protection as to demonstrate wealth, power and status in the community. The view from the tallest tower in San Gimignano is one of the most breathtaking I've ever seen.

6. Fantastic countryside -- it's every bit as beautiful as I had come to expect. Tall Italian cypress trees, olive trees, vineyards, popping around corners and seeing little hill towns in front of you, everything green and gold and russet against a very blue sky.

5. Medieval fortifications -- Lucca's old city walls are still entirely intact, and after work the locals and a smattering of tourists stroll around the old city center on the walls (some run and some ride bikes). Monteriggioni is also an entirely intact hill fortress, built to protect Siena from Florence. Florence, Siena and San Gimignano all still have some of their old walls.

4. Siena's Duomo -- this is the most over-the-top church I've ever seen! The splendor of the marble decoration was not at all what I expected, especially the intricate marble carvings in the floor. Both the interior and the exterior take advantage of different colored marble to very striking effect.

3. The Medici -- even today you can't walk around Florence without tripping over evidence of the power and impact on the then-independent city-state. Jobs, art patronage, huge public and private buildings. The two major collections of Medieval and Renaissance art, in the Uffizi Gallery and the Pitti Palace, are Medici family collections.

2. Brunelleschi's dome -- I was stunned at how big the dome on the Florence Duomo is. One of the highlights of the trip was climbing up to the top of the dome, which not only gives you a spetacular view of Florence and the countryside, but also enables you to climb between the two layers in which Brunelleschi built the dome so that he wouldn't have to use scaffolding. The climb also enables you to walk along the lip of the inside of the dome, up close and personal with the frescoes decorating the dome's interior, which are amazing.

1. David -- Michaelangelo got every detail, and got them all right. He looks like he could walk off of the pedestal and shake your hand. And his hands and feet are not as grossly exaggerated as I had thought. The marble almost glows it's so beautiful, and the detail of the veins in the arms and the bulging neck muscles to signal his exertion are really striking. They've also displayed himi beautifully -- you can walk around back and notice details that you never realized, such as the strap of his slingshot going down his back and the freakishly realistic carving of his calf muscles differently on the standlng leg and the moving leg. It is rightly the symbol of humanism and individual autonomy, at least in my mind.

Also worth noting were how nice everyone was that we met, how patient they were with my almost-verb-free Italian, and the quality of the food and wine.

posted by lkkinetic | 9/23/2003 06:05:00 AM

Sunday, September 07, 2003  


The Knowledge Problem will be taking a two-week holiday, resuming on Sunday 21 September. I am headed to Budapest for a week to participate in the graduate student workshop of the Ronald Coase Institute and to present a paper at the annual conference of the International Society for New Institutional Economics (ISNIE). After that, a week's holiday in Tuscany.

I'll post occasionally as possible and necessary in the interim, but for the most part ... see ya on the 21st!

posted by lkkinetic | 9/07/2003 11:45:00 AM


My friend Jim Johnston is very knowledgeable about energy markets, and he had a commentary in the Chicago Sun-Times last week on how to improve grid reliability.

Thus, we have a new pattern of generation and consumption that overlies the older locally oriented grid structure. It is a prescription for disaster that promises to persist unless we do something about it.

In referring to the two Wall Street Journal commentaries by Bill Hogan and Peter VanDoren & Jerry Taylor that I discussed in this post, Jim says

One Harvard economist, who helped design the failed system in California, suggests a federal takeover of the transmission grid. Two analysts from the libertarian Cato Institute suggest we let the free market find the solution without giving us a hint of what that might be.

We can do better than that. We can look at similar systems to see how they handle the relationship between shippers and the owners of the transmission.

One example is the system of interstate oil pipelines, and another is the system of natural gas pipelines in Texas. What these examples of safe and efficient transportation show us is that the operations, rules and rates are mostly determined by the owners and the shippers, not regulators. Frequently the shippers are also owners of the pipelines on both sides of the deal: Shippers are sometimes producers of oil and natural gas, and sometimes they are large consumers of energy.

He then goes on to develop the idea of using the business model that shippers use for natural gas in Texas as a model to follow for minimally regulated, more robust and creative electricity transmission. A must read.

posted by lkkinetic | 9/07/2003 11:36:00 AM


The recent blackout in the Northeast and Midwest U.S. and Ontario have brought electricity transmission to the foreground of policy debates. In a new Reason study , Adrian Moore and I explore ways that technological change and innovative contracting practices create potential competition for the grid, or in other words, make the grid contestable. The executive summary of the study:

The dramatic blackouts in the Midwest and Northeast in August of 2003 have focused our attention on electricity policy once again. This time the issue is the grid—the transmission network that transports electricity across regions. Our policies governing electricity transmission—regulating it and moving slowly toward changes to support competitive wholesale electricity markets—are getting a sharp look from more people than ever. Existing long-distance transmission infrastructure is insufficient to support the changes that have come about in the industry since the deregulation of the early 1990s that led to the dramatic increase in the trade of generated electricity.

Ways to remedy this situation fall into three categories: build and upgrade transmission, build generation closer to population centers, or reduce the demand for transmission services. This study provides an analysis of the institutional changes being proposed and debated, particularly FERC’s RTO policy. By establishing RTO rules, FERC can move the industry toward building and managing a national grid network. But at the same time, FERC risks creating an ordered competition— competition engineered based on an assumption about how competition ought to be— rather than a competitive order, which arises spontaneously from human action and economic evolution based on choices and change over time. While ordered competition through the RTO structure could simply be a step to move the industry toward an institutional structure in which a competitive order can emerge, it is at best only part of the legislative and regulatory changes that would produce competition in the industry. To do that, legislative and regulatory changes will have to focus on removing barriers to entry and to technological change in the industry.

Our recommendations encourage the use of distributed generation technology, innovative forms of contracting, and other institutional and technological changes that would increase the contestability of the transmission segment of the electricity value chain, and could do so in a flexible, open-ended way.

posted by lkkinetic | 9/07/2003 07:53:00 AM

Thursday, September 04, 2003  


Here's a little grid roundup: a USA Today editorial from last week on the barriers facing transmission upgrades. Here's one they forgot: the tax treatment of the heavily depreciated asset base means that utilities have little incentive to sell their transmission assets to a more consolidated owner that could internalize a lot of these goofy and problematic transaction costs and incentives. The capital gains tax liability on the sale would be a deal-breaker in most situations.

An informative and well-written overview from the Washington Post, also from last week (hey! I've been busy.), about the consequences of the fragmentation of ownership in the industry, in conjunction with the regulatory environment.

An LA Times article from yesterday about the Congressional hearings into the blackout that commenced yesterday, and the issue of reliability.

posted by lkkinetic | 9/04/2003 11:10:00 AM


A lovely double entendre ... I encourage you all to check out Marginal Revolution, a new blog by George Mason University economists Tyler Cowen and Alex Tabarrok. Some of you may be familiar with Tyler from his research and his posting at The Volokh Conspiracy. Tyler and Alex are incredibly insightful and sure to be full of engaging and thought-provoking analyses.

I am already indebted to Tyler for this link to popular uses of game theory. It starts with reference to one of my favorites in The Princess Bride: "I know that you know that I know that you know ... " And in their book recommendations is included one that I cannot recommend more highly than I already have in this site: The Lunar Men: Five Friends Whose Curiosity Changed the World.


posted by lkkinetic | 9/04/2003 10:55:00 AM


Okay, let's review. In the last two weeks of August we had

1. a burst pipeline in Arizona
2. six refineries out of service for up to a week because of the blackout
3. an impending Labor Day holiday

So the increase in gasoline prices was the result of price gouging, right? At least that's the contention of many politicians, who are only too happy to spend our tax dollars on yet another federal agency investigation into retail gasoline prices. This time Congress has requested that the Department of Energy investigate, in conjunction with the Federal Trade Commission, which I believe has performed up to 21 investigations of retail gasoline prices in the past decade in response to Congressional requests.

First, how does one define price gouging? Is it charging what consumers are willing to pay? If so, then what is the alternative that the politicians propose -- price caps? The consequences of price caps are well known, and I pose the following question to our representatives: would you prefer the ire of constituents who have to pay more for gasoline, or the ire of constituents who have to stand in line for an hour to buy gasoline because there isn't enough available at the capped price? You face a choice, and history has shown us repeatedly that using price to prioritize higher-value uses of goods and services is a far more efficient, flexible, and I would argue fair way of doing things than through political regulation motivated by populist demagoguery.

DOE official Kyle McSlarrow said they would investigate to see if anyone took advantage of the situation to manipulate markets, but he and the DOE should also factor in this question when considering that issue: can you manipulate markets when consumers can choose not to drive? With national average prices pushing $2/gallon (still not high historically), consumers are autonomous and can choose whether or not it's still worth it to them to drive to wherever they were going to drive over the holiday.

Consumers are not automata, are not victims at the mercy of the rapacious whims of petroleum companies (which, by the way, operate in very competitive wholesale and retail markets). Consumers are automomous individual agents who can make choices based on their preferences. They have the power to say NO, to choose not to buy gasoline. Prices will move to reflect that choice.

One of the myriad reports on gasoline price spikes is this interim FTC report from summer 2000, which was then finalized in March 2001. An academic article on this report also appeared in the most recent volume of The Energy Journal. This quote from the FTC report summarizes their findings:

The completed investigation uncovered no evidence of collusion or any other antitrust violation. In fact, the varying responses of industry participants to the price spike suggests that the firms were engaged in individual, not coordinated, conduct. Prices rose both because of factors beyond the industry's immediate control and because of conscious (but independent) choices by industry participants.

Over, and over, and over again, reports and research find that the industry is actually behaving in a competitive manner, notwithstanding the increasing concentration and decreasing number of firms. Furthermore, they are doing so in the face of fragmented markets that are the consequence of regulatory fuel formula mandates that make gasoline less substitutable across markets, increasing price volatility and seasonality.

So, please, stop throwing our tax money at populist investigations of the consequences of a bizarre concatenation of circumstances. If Congress wants to do something to reduce the volatility of price spikes in retail gasoline markets, they would better serve us by revising the federal oxygenate requirement to be outcome and performance-based instead of input-based, which is a root cause of all this mess.

posted by lkkinetic | 9/04/2003 10:15:00 AM
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