April 29, 2008


Michael O'Hare (emphasis mine):
The ease with which politicians say "gas prices are too high" combines their cowardice (or cynicism and irresponsibility, or maybe just ignorance) with a widespread confusion of price with cost in the public mind, one for which we educators probably have to answer though a supine and feckless press isn't helping at all. The distinction is no piece of technical arcana, but one of the most fundamental keys to getting policy right, and in this case, a very big batch of policy with enormous consequences. If you don't understand the difference, you do what Hugo Sanchez Chavez does and suppress the price by enormous public subsidies. Unfortunately, the cost of anything is quite independent of what we want it to be, or the price at which it is offered, because cost [is] a reality sort of thing, the value of the economic resources consumed in providing it.
Quite so, except for that last sentence. The confusion of price with cost is pernicious not just because it leads to bad economic policies, but because it assumes that the quantity we consume of something is constant. Such a belief precludes the possibility of increased efficiency, conservation, or other measures to reduce the quantity of that which we're consuming. High gas prices aren't fun, but they're especially not fun when you have an economy like ours that is A) built around the automobile, and B) has taken only cursory steps to increase the fuel efficiency of our automobile fleet. Cost is dependent on, if not what we want it to be, then on what we do, and there is much we can do, at least in the long run, to change our gasoline consumption patterns; likewise with (coal-based) electricity. (To be fair, O'Hare makes this point, more or less, in the next paragraph.)

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