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Saturday, September 23, 2006

California's Attempts to Save the Environment

Comments from the New York Times Friday Sept.15, 2006 In Gamble California Tries to Curb Greenhouse Gases

California's democratic controlled legislature and the Governor decided to "reduce industrial carbon dioxide emissions by 25% by 2020" this is a measure that affects power plants any major type of industry (power, oil refineries and cement plants). In this effort, California decided to place more restrictions on the power plants it would conduct business with. Because of California's incredibly large market-share, they might be the only state that can pull off such a maneuver. "When you have 38 million customers you don't have access to, you rethink. Selling to Phoenix is nice. Las Vegas is nice. But they aren't California" says the environment program director at the William & Flora Hewlett Foundation.

California's jump in this direction is notable because this is the very state that "jumpstarted the worldwide adoption of catalytic converters" and their "per capita energy consumption has been flat for 30 years, even as per capita consumption has risen 50% nationally." California is however playing with fire because it is betting that it can "reduce emissions without wrecking its economy and therefore inspire other states and countries to follow its example on slowing climate change." California runs the risk of hurting its own residents with a clean-energy mandate forcing utility bills to increase. This is an especially scary idea for California because the deregulation plan "floundered in 2000; bills soared and an economic crisis ensued." But even without a potential crisis it is important to note that "California's electricity rates are about 40% above the national average."

One of the lawyers for the Electric Utility Company complained California is "discriminating against some of them and creating artificial barriers in the marketplace for electricy" he also notes "California consumers could end up paying more for their energy and struggling to find enough." Barriers to entry limit the number of firms operating in a market which results in promoting monopoly power on the part of incumbent suppliers. Monopolistic conditions cause inefficiency in the market. Eventhough it's difficult to comprehend- there is an efficient level of pollution. Sense we know California isn't likely to exceed the efficient amount of pollution, they are likely leaning towards too much pollution control. More specifically there are too many resources (beyond the efficient amount) in the economy devoted to pollution control. Plus creating monopolistic conditions in their energy market is likey to cause inefficiency. It's a noble goal but the policies implemented go too far.

"Noble goal", eh? In addition to the ideas you apply from our class you might have noted one more. California's policy seems to be related to an effort to provide a public good, i.e., reducing global temperatures would offer a good which was both nonrival and nonexcludable. Of course, this is not a market failure because we are talking about a state government policy to deal with what may well be a source of market failure. But, just how much of an impact can we expect California's policy to make with respect to the environmental problem? If California is hoping to offer a good example for other governments, do you wonder if the people in the California government have ever heard of free rider behavior?
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