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Posts Tagged ‘Pickens Plan’

Value of High Prices

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.

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