Is there any benefit to high prices? Absolutely. It creates incentive for efficiency, innovation, and development of new technology. As a free-market advocate I firmly believe in the need to let supply and demand, and prices dictate the marketplace. Only then will the “real” values of a commodity or product be known. Many oil-rich countries subsidize the the cost of fuel for their citizens, resulting in extremely low prices that create behavior that is inefficient. Wikipedia states:
Fuel subsidies are common in oil-rich countries. Venezuela, which has vast oil reserves, maintains a price of Bs.F 0.097 per litre (around US$0.05), and has done so since 1998.
If my math is correct that works out to around $0.20 a gallon. And so people, such as those in Venezuela, use gasoline at will, since the costs are so low. This can become expensive for the government to subsidize (since that is not the true cost in the market) so they will lower or cut the subsidies, which then can lead to unrest from the people since their behavior is having to be changed drastically without the benefit of gradual change and predictability that comes in a free market.
The reason I started thinking about this is Elijah’s statement in an earlier comment that he likes the Pickens Plan to break our need of foreign produced energy. I like the plan too, if only it’s originator T. Boone Pickens is willing to pursue it without government subsidies, which I’m afraid is a significant part of the plan. I am a fan of wind, solar, wave, and any other kind of power that we can harness. But taxing the public to pay for it takes away the market forces necessary to decide the most efficient and reliable alternative. Our best bet, and the one that is probably hardest to swallow, is to leave things alone state-wide and federally and let businesses and consumers fight it out in the marketplace. If fuel prices get high enough, then it becomes profitable to pursue alternative means of energy and companies will do just that, I guarantee you. As shown earlier, subsidies are typically only useful for creating behavior that is not indicative of what is really most efficient. This behavior and the subsequent need for correction can many times be worse than what the original subsidy was supposed to alleviate.
For further proof of this, read about the harm America’s corn-based Ethanol subsidies have done here, here and here.
Josh
Elijah
Greg
Michael
Mark
Dude Man
Hey Mark,
Here’s something I don’t understand: During the election, both candidates made all kinds of promises to pump government money into alternative fuel research, as if this was a new idea. But didn’t George W. dedicate a butt load of money to this already? I remember he made a big deal about it in one of his state of the union addresses, about how we needed to kick our oil addiction and all of this. So what happened with that? Do these government-funded research projects have anything to show for the millions of dollars they’ve received? Or did Bush never give them the money? I’d like to know what money has been spent on research and what’s been accomplished, if anyone is privy to this info (and I’m not baiting here, I’m genuinely interested).
In general though, I agree whole-heartedly with you Mark. It seems to me that every significant innovation that this country has ever produced has been a product of the free market or military research (which is government funded of course, but has a very specific purpose- combat). I could be wrong though, I haven’t really researched it. Here’s an open-ended question (again, no baiting involved): What are three innovations that federal government-funded research have produced that did not originally have a military application? Tang does not count.
It seems to me that, like you said, there is all of the incentive in the world for the free market to produce energy-efficient products, and government money doesn’t seem to generally speed innovation up, and actually slows it down in many cases.
Thoughts?
Hey Pete-
Bush was at the forefront of the ethanol rage, so that was his project that he made a big deal about. The results of that initiative were linked to at the end of the post.
As for government funded research outside of military applications, there’s probably tons. NASA and it’s efforts for one. Obviously there are some strategic ends militarily that have come out of it (satellite surveillance technology and such), but much pure science has come out of it as well.
I have not thought much on this subject, but it seems there could be an argument made for at least limited subsidies for research into new technologies. It strikes me that in the instant example of new energy sources, if I’m an energy company trying to figure out where to sink some R&D dollars, I’m going to be hard put to make a call. The reason is that I just don’t know how the whole thing is going to pan out in the next several years. And the reason for that is because there are too many variables to know what the next big thing is going to be. Surely this nation is going to need to move away from foreign oil, and eventually oil altogether. But is corn the way to go? Don’t people need to eat the stuff too? Maybe we’ll go back to plug-in cars (remember the ones the auto industry confiscated and destroyed back in the 90s?) and thus we’ll need more solar, or wind, or what have you.
Note that people/consumers are motivated in their spending in this brave new environmental world more by their morals and sentiments than by rationality. After all, we are buying to promote the happiness and prosperity of generations to be born decades and centuries into the future. “Efficiency” is going to be a funny word to use in such a context. Appealing to the sentiment of consumers who want to feel goosebumps for giving Baby 3000 a “cleaner planet” is a pretty tough variable to factor into a marketing model.
So maybe subsidies are useful to the extent they help give an indication of which way to invest a company’s R&D dollars. This stimulates energy companies to actually invest given that their investments are not an out-and-out gamble.
Of course, the subsidies should be designed to go only so far as to provide this minimal stimulus, this “shove over the cliff.” Subsidies should NOT be ongoing. Like in the farming industry. What a syndicate that has become.
Tim-
Good thoughts. I have sometimes been swayed by the idea of subsidies as a way to promote good behavior (as in the case of recycling), but even then after further review I think it probably isn’t worth it. Energy companies competing against each other without gov’t intervention WILL figure out the next thing, because that is what businesses do. They take risks in R&D so they can be the ones to profit. It is actually in the world of subsidies that can stifle innovation. Why would I spend money on R&D if the gov’t later gives tons of money to my competitor.
Our country doesn’t subsidize the music biz, and they are able to find what the next big thing is, because they are slaves to the marketplace (as for artistic merit this may not be the best example).
As for consumers motivated by morality or sentiment. I don’t think it matters. Money matters (man I’m a capitalist pig). I love the new IBM commercials where the surly manager is telling his worker that he’ll sign her proposal for “environmental” changes because it’ll look good to the public that they are going green or something… and then she says, “this will save our company millions in energy costs” and then all the cartoon animals come flying out and he gets happy. Silly, but true. Efficiency/better behavior = lower costs = more customers (regardless of sentiment).
I think a better stimulus for innovation is lower taxes across the board.