Saturday, May 10, 2008

Higher energy prices and changing incentives

Even as politicians are doing everything possible to make an ongoing gas price surge even worse, Ken Rogoff finds a silver lining in the high prices. He argues that "high fuel prices are the best way to inspire energy conservation and innovation".

He writes, "High prices for commodities today mean more supply for future generations, while at the same time creating an incentive to develop new ways to conserve... Again, high prices are helping in ways that Western politicians seem afraid to contemplate."

Proof that this may actually be happening is available here in a NYT article. With gasoline approaching $4 a gallon, people are increasingly abandoning their private vehicles and moving to using mass transit systems. Proof of this are the sudden surge in passenger traffic in bus and metro lines.

The article finds that "the biggest surges (in ridership) - of 10-15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited". With the national average for regular unleaded gasoline reaching $3.67 a gallon, up from $3.04 a year ago, car buyers too are gravitating towards smaller vehicles and per capita average gas consumption by Americans is expected to decline for the first time since 1991.

It writes that other incentives may only be adding to the attraction of public transport, "Wireless computers turn travel time into productive work time, and more companies are offering workers subsidies to take buses or trains. Traffic congestion is getting worse in many cities, and parking more expensive."

Higher prices, especially energy prices, are a form of Pigou tax on gas consumption, something which politicians across the world have not had the courage to impose. It is the ideal incentive to reduce our unsustainable gas and energy consumption, vital to sustaining our environment and even our long-term economic growth. There is an excellent wrap-up of the sustainability problem and the solution (reduce consumption) here, here, here and here

Update 1
Richard Posner roots for $200 per barrel oil, since it would lower consumption and expedite the process of search for cleaner fuels. Gary Becker too feels that higher gas prices will nake the oil extraction industry and oil use more efficient.

Update 2
Paul Krugman gives the comparative example of Europe and US on fuel consumption. He writes that higher oil prices have incentivized Europeans to shift to more fuel-efficient vehicles and cut down usage of private cars. Krugman feels that the more definitive shift towards reducing oil consumption in the US will come only if America moves from its car-dependent suburbia culture to more densified population centers with adequate public-transport facilities.

Update 3
Here are five good outcomes which have resulted due to higher gasoline prices - mass transit boom, lower obesity rates, shorter commutes, fewer accidents, and biofuels caze.

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