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Category — Government Failure

Ignorant Arrogance: Energy “Market Failure” Revisited

[Ed. note: Dr. Grossman is author of the just-released U.S. Energy Policy and the Pursuit of Failure, an important and sobering tome with much insight about today's debate.]

The U.S. government has claimed over the years one and one reason only for government intrusion into markets: Market failure. As a Carter administration document put it:

The first assumption for any commercialization activity by the government is that the market either has failed or will fail to make the optimum choice … [and] that the government policy maker can make a better selection than can the market.

Every administration has reiterated something like this. The Clinton administration made the point that the government needed to get involved in creating an 80-miles-per-gallon “supercar” because as the president claimed, “[T]here are a lot of things that we need to be working on that market forces alone can’t do.”

In any case, the endeavor was a flop—like virtually every effort at government development of new energy-using technologies or alternative energy resources. It cost U.S. taxpayers about $1.5 billion.

Government Failure?

But what was that supposed market failure? Clinton didn’t say, but it seems his administration thought the failure was an information problem; the market was lacking foresight. The price of gasoline was too low (whatever that meant), and so government had to step in to help create something people would need when the price went up [Read more →]

May 2, 2013   3 Comments

Economic Failure at U.S. EPA: NAM Study Raises the Hard Questions

A recent study commissioned by the National Association of Manufacturers critically assessed the U.S. Environmental Protection Agency’s cost- benefit analysis with respect to six key regulations: Utility MACT, Boiler MACT, Coal Combustion Residuals, the Cross-State Air Pollution Rule, Cooling Water Intake Structures, and Ground-Level Ozone. The NAM study details the significant differences between EPA’s cost estimates and those of industry sources, while highlighting problems and inconsistencies with EPA’s methodology. Most importantly for manufacturers, the study estimates the impact of EPA rules on the manufacturing industry, directly and through indirect macroeconomic effects.

A key finding of the report is that “the annual compliance costs for all six regulations range from $36 billion to $111.2 billion (by EPA estimates) and from $63.2 billion to $138.2 billion (by industry estimates).” Notably, the study was picked up in the trade press and recognized by the House Energy and Commerce Committee, which reiterated the study’s finding that “major new EPA rules could cost manufacturers hundreds of billions of dollars and eliminate millions of American jobs.”

Textbook Regulation: Forgetting Government Failure

The NAM study acknowledges significant gains in air and water quality in the United States since the creation of the EPA but contends that federal regulators are up against steeply diminishing returns.

After more than 40 years of improvement in air and water quality, further progress is still possible. But how much more? What would be the benefits? And at what cost? Economics is about making the best use of scarce resources, and public policy formulation must heed its implications: policy decisions may produce economic benefits, but they also impose costs. Economics also teaches the theory of diminishing marginal returns, which holds that even though an additional unit of input may generate more output, there is a point beyond which the addition to total output from each new increment of input begins to decline. These economic concepts are relevant to the public’s understanding of the implications of these emerging EPA regulations.

Or, as Julian Simon put it when he discussed the trade-offs of dealing with pollution: [Read more →]

January 9, 2013   2 Comments

Government as Referee: Who Regulates the Regulators?

A recent opinion-page editorial by a Ray Hankamer Jr. in the Houston Chronicle, Government as Referee for Society, espoused big government to promote basic protection in a modern society. 

Such is the romantic view of government; the Good Government and We the People view of democracy where the body politic is all of us (not us versus them). But the real world is different from this all-to-common textbook view.

Romantic Government

Hankamer begins:

“Leave the market alone and it will self-regulate just fine.” “Stop taxing the people and let them spend their own money instead of letting the government take it and waste it on ‘meddlesome bureaucrats and business-stifling regulators.’” This is the viewpoint of the tea party and many Republicans. But wait a minute: How would such a philosophy really work if implemented?

He then invokes the sports metaphor to conclude that we need federal regulators in an alphabet soup of agencies to do the necessary and sometimes dirty work to achieve fairness:

They are the public’s referees and umpires, such as the Securities and Exchange Commission, the Environmental Protection Agency and the Fish and Game Commission. They are there to enforce the rules for the good of all the people.

But when they are reined in, the public suffers. Remember Enron, WorldCom, Bernie Madoff, Stanford Financial, Lehman Brothers and all the other examples of the market being left alone to self-regulate?

One caveat, Hankhamer adds: “Overzealous referees and umpires can stifle an athletic contest, and overzealous regulators can do the same for an economy. But the suggestion that we can play the game with no supervision is preposterous.”

In response to Hankamer’s use of the tragedy of the commons as a pervasive reason for government intervention, I opined in a letter published by the Houston Chronicle: [Read more →]

October 14, 2011   6 Comments