Thursday, February 6, 2014

If the GOP loves markets, why are they fine with market failures?

Markets are generally awesome. People are right to defend them, laud them, and promote them. When something is in short supply, the price of this thing goes up and incentivizes increased production (and of course, vice-versa). When trying to come up with a way to solve air quality problems, one is basically trying to solve a market failure. This failure occurs when the price of something doesn't accurately reflect the social ills its consumption produces.

Take gasoline, for example. It’s broadly priced via supply and demand; the market doesn't know that the results of combustion cause people to develop respiratory ailments. Because the market doesn't know this, it under-prices gasoline and thus it is over-consumed relative to the environmental, respiratory, and (yes, even) economic damage it causes. (The more dependent the economy is on gasoline, the more local economic policies are subsumed by fluctuations in the global price of oil.)

Sadly, instead of fixing this mispricing of gasoline and ending the market failure, politicians (of all stripes, but especially the GOP—democrats tend to favor taxes on carbon) tend to favor industrial policy wherein they pick which technologies may save us from choking on our exhaust. We see this in the myriad subsidies, deductions, tax credits, loan, and grant programs being thrown to the solar, wind, and natural gas industries in an attempt to bolster the country’s efforts to move to clean energy. In light of this and the government bureaucracy needed to run the complicated programs, it’s odd that the GOP tends to throw the word socialism around derisively. It's especially odd because their policies toward energy are essentially keeping the market from functioning in the face of high and socially-harmful energy consumption.

We all get that the government doesn't make great bets on particular industries or companies. That’s fine; few of us can predict the future. Instead of trying, they should just keep government lean, raise the price of dirty fuels, and let the market sort out the solution. John McCain, the former GOP presidential nominee, supported this openly during his 2008 campaign. So why isn't this on the local or national legislative radar now?

Postscript: For those wondering, the impact of higher energy costs on consumers could be mitigated by subsidized transit passes, funded by the higher tax on gasoline.

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