SHOULD GOVERNMENTS PROVIDE PRICE SIGNALS? NO, THEY CAN’T DO IT

Lynne Kiesling

Ed Reid tried to post the following comment on my post below regarding the GAO’s report on energy demand in the 21st century:

I am concerned about the implications of “providing clear and consistent signals to energy markets”, as opposed to allowing free communication of clear signals among market participants. The US energy market does not need the government “providing signals”; that has been going on at the state and federal levels forever, with easily documented but generally adverse results. Enough!

Yes. Let me be clear about my meaning from that post. Government organizations cannot provide price signals because they are not, and should not be, market participants. If we think that there is some need for transparency from institutions that is not emanating from the existing market institutions, then the proper role of a regulatory organization is to clear away the institutional rubble and underbrush that prevents the communication of clear and transparent price signals among market participants.

My argument in the preceding post was simply to say that at various levels and in various parts of the energy industries, individuals in government organizations have chosen to muck up the transmission of that information. They have done so for both putatively noble objectives and pure rent-seeking and political objectives, but muck it up they have. Thus I think that they should take as a primary objective clearing up all of that muck and underbrush that they have inflicted upon increasingly interconnected and dynamic markets.


2 thoughts on “SHOULD GOVERNMENTS PROVIDE PRICE SIGNALS? NO, THEY CAN’T DO IT

  1. Lynne, having clarified your views on this subject once, would you mind doing so again? Please define “all of that muck.”

    Are you, for example, talking about gasoline taxes? Electric rates arrived at through a regulatory process at the state level? Ethanol subsidies?

    All of these and much else besides contribute to sending price signals to consumers, sometimes (as with gas taxes and ethanol subsidies) signals contradictory to one another. There isn’t much prospect of, nor is there reason to want, a government responsible for maintaining highways and ensuring that energy gets to where it needs to be to take no action that would send any signals at all. So what specifically are you talking about?

    I’m a little concerned, by the way, about the way you refer to “…this labyrinthine web of interferences that leads individuals to choose to consume large amounts of energy without providing the institutional framework in which those individuals could be empowered to choose to consume less energy.” I’ll assume that by “institutional framework” you are not talking about massive subsidies for utility demand-side management programs or hybrid cars. Though in fact I am not completely clear here either about what you are talking about, the notion that government interference in the market leads Americans to choose to consume vast amounts of energy appears to me as an invitation to self-deception.

    Americans use large amounts of energy because energy is cheap. They are empowered to use less energy when energy becomes more expensive. We know that they will be so empowered sooner or later, in a gradual way or suddenly and disruptively, the choice being largely up to government and necessarily taking the form of interference of some sort in energy markets. We are kidding ourselves if we think the pain and difficulty involved in making choices in this area would not be there if government would just stay out of it.

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