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Tuesday, September 13, 2005

Senators urge boost in standards of fuel economy


From the Washington Times:
"Congress should consider raising fuel-economy standards for all vehicles for the first time in 30 years in light of the gasoline shortages and huge spike in pump prices caused by Hurricane Katrina, key senators said yesterday.

'I believe we must take another look at the CAFE standards,' said Sen. Pete V. Domenici, New Mexico Republican and chairman of the Senate Energy and Natural Resources Committee, referring to the Corporate Average Fuel Economy rules enacted in the mid-1970s but not updated since.

'We looked at that before, and it was not politically possible. I'm not sure that will be the case after Katrina,' he said.

His comments came as the government reported that gas prices last week breached the $3 level for the first time on average nationwide, with the biggest increases seen in Mid-Atlantic states such as Virginia and Maryland, and in the District, where the average price for regular was $3.29 a gallon.

Republicans and Democrats both said they suspected price gouging as gasoline costs soared in the aftermath of Katrina, but they complained that the government doesn't have the ability to prevent such market abuses.

'The American people are being victimized more than any free market would warrant,' said Sen. Gordon H. Smith, Oregon Republican.

Mr. Smith and other senators at a committee hearing yesterday said regulators, including the Federal Trade Commission, are not aggressively pursuing price gouging and other market manipulation by energy companies reaping huge profits.
'There are growing concerns that oil companies are making too much in profits at the expense of consumers,' Mr. Domenici said.

Some relief at the pump is on the way as the prices of crude oil and wholesale gasoline dropped for a second day in New York trading, and are close to levels that prevailed before the hurricane struck the Gulf Coast, the heart of the nation's oil-producing sector.

Witnesses at yesterday's hearing said pump prices will remain high for weeks and possibly months, however, because the hurricane knocked out about 10 percent of production at oil wells and 5 percent of production at refineries that could take up to a half-year to restore. "
How can we use economic analysis to consider the public policy issues raised here? I can suggest some specific questions:
Is there a market failure justification for the national government mandating fuel economy standards for our vehicles?

Does the term "price gouging" have an economic meaning in general, and do you think "price gouging" is an accurate way to describe what has happened after the hurricane?

Is there a market failure justification for the national government to try to deal with "price gouging?"

I do not believe that there is a market failure that would justify the government mandating fuel standards to be changed. We suffered a natural disaster, that subjected the market to change,a nd there for gas prices went up. We lost resources that we use on a regualr basis, causing a shortage in supply, making price rise. Thats what the market does. With time the price will fall, which is what it is doing. The market itself is correcting, just like it should.

The term "price gouging" to mean is just another way of saying "price overcharging". The market is not overcharging people. Like I said above we lost some of our "supply" and therefore prices were raised, and prices will settle down, when the market has balanced out again. We suffered a "small" (in my view) cost push inflation. Price will settle back at a equilibruim in due time. (if not the government then should interven and 'allocate resources effiencty in order to achieve effiency')

I believe both above statements answer the 3rd questions about the government needed to or not need to deal with "price gouging".
It seems to me that changing the CAFE standards is completely unnecessary. Though the politicians involved seem to think that people buying gas are somehow powerless in the face of rising fuel costs, I would argue that we are not. It is easy enough to reduce gas consumption- it is not clean air! The quote that spoke of people being "victimized" by the rising gas prices is especially amusing; a nebulous idea, such as the market, is not capable of causing anyone to be victimized.As for the free market allowing victimization, it seems to me that definitionaly it does no such thing.
While gas prices are high, I do not believe they are necessarily inefficient. Yes, the hurricane drove them up temporarily, but are seeing small drops in the prices. However, I do not believe we will be seeing large decreases in fuel prices for a long time, if ever, unless there is a fundamental change in demand for gas. I doubte the changing the CAFE standards will do much, if anything--it was stated in another post that it would increase fuel efficiency by .5mpg. Instead, as gas prices remain in the $2-4 range, and especially as demand in China rises, I think many people will get fed up with fueling a large SUV and eventually change their driving habits or switch to more fuel-efficient cars--market responses to high gas prices. I think Valeska is right: there is no "victimization" from high gas prices. This is not an issue of property rights (in which government has role), it is a market issue, and because I do not believe we have a market failure (high prices does not necessarily mean market failure!), then the government really has no role here.
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