When Prices Are Wrong, Markets Don't Work | Peter Van Doren | Cato Institute: Commentary

When Prices Are Wrong, Markets Don't Work | Peter Van Doren | Cato Institute: Commentary: 'if gas prices go up and a commuter decides to start driving a Prius, or to move closer to work so the old gas guzzler travels fewer miles, this will have equivalent beneficial effects on aggregate fossil fuel consumption. One does not have to purchase an energy efficient vehicle to reduce fossil fuel consumption.

Even though I used just two paragraphs and no math to articulate this obvious point, voters and their elected officials resist this simple insight and instead prefer to impose only energy efficiency standards on manufacturers of consumer appliances and automobiles. A singular emphasis on energy efficiency rather than prices has two important drawbacks. First, more efficient appliances and automobiles cost much more to achieve equivalent energy savings than a tax on fossil fuel consumption. This occurs because higher prices encourage all possible avenues of reducing energy consumption — which efficiency standards do not. Second, more efficient appliances and automobiles reduce operating costs, which leads consumers to use more energy than they would if prices had increased.'