Monday, 28 March 2011

Saving on shoes or on energy?

A few days ago I rebutted my wife’s criticism on how careless I was in relation to saving electricity by remembering her that she had 10 times more shoes than I have. She replied that it was completely different.
She said: we are not self-sufficient in energy, energy is less friendly to the environment and I was wasting the money that the government spends promoting the use of alternative renewable energies and energy efficiency. I replied that her arguments were economic nonsense. Who is right? Here are my arguments.

I agree that we should not be wasteful, whether we are talking shoes or electricity. But what is wasteful is to a large extent a matter of personal taste. If she prefers shoes and I prefer electric gadgets nobody should interfere with our preferences. That is what is called consumer sovereignty.

The argument for self-sufficiency goes contrary the only indisputable law in economics, Ricardo’s law of comparative advantage, which provides the rationale for free trade. In a world of free trade the argument for self-sufficiency in energy or food is as wrong as the argument for self-sufficiency in shoes or chewing gum. The risk of supply disruptions in basic necessities such as food or energy caused by war or natural catastrophes must be minimized through buffer stocks or forced savings during those periods not through a permanent constraint on our preferences.

The decision on when to exhaust non-renewable resources is an issue for their owners to decide by quoting a price that in their view gives them the best return over time. Consumers only have to choose among competing sources of energy. In the recent past coal has become almost obsolete as a source of energy. If the same happens to oil or gas so be it. Consumers do not need to worry about that as long as they have alternatives as they do (nuclear, water, wind, solar, etc.).

The fact that different sources of energy have different negative externalities is a matter for regulators who should find appropriate ways of internalizing such costs (the polluter-pays rule) so that they will be reflected in the price charged to consumers.

This is a proper role for governments. But they have no right to spend our taxes to tell us what we should buy or not buy, regardless of whether we are being frugal or conspicuous in our spending. Nor should they subsidize some producers at our expense. If they wish to promote research in new technology they should support both renewable and non-renewable industries.

Today we need to regulate the regulators. We need to make sure that their only job is to force the internalization of negative externalities and to fight monopolistic or oligopolistic misbehaviors. They have no business influencing neither what we buy nor how much we buy. This type of freedom is an essential part of constitutional liberalism.

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