Minor Econ 101 lesson, related to the post below: Why almost all chronic lines are caused by price controls.

A very very basic Econ 101 principle is: people don’t leave $100 bills lying around on the sidewalk for very long (and you thought economics was hard!). Persistent gas station lines are the economic equivalent of $100 bills (more like $10,000,000 bills) lying all over the floor at Grand Central Station. Almost everyone willing to pay 28.9 a gallon in money (I think that was the price of a gallon of regular circa 1973), and 2 hours in time, to get a tank of gas, would surely be willing to pay 32.9 to fill up with a nominal wait. Since the gas station owner would also rather charge 32.9 than 28.9, some intervening force is pretty much the only explanation for the persistence of 2 hour lines for gasoline at 28.9 a gallon.

What makes a crisis? Paul Krugman suggests that a new round of intifada-related Middle Eastern oil embargoes might spawn a third oil crisis. That won’t happen unless Congress does something really stupid.

What put the “crisis” in the 1973 and 1979 oil shocks? Gas lines. The 1973 and 1979 oil supply shocks were certainly disruptive, and definitely not good for the economy. But the “crisis” was having to wait three hours to buy your legal limit of four gallons of gasoline, hoping that there will still be some in the tanks when your car finally inches up to the pump.

As all economists at the time knew, that was caused by one thing and one thing only: price controls on gasoline. There is literally nothing Iraq and Libya can do to bring back the 1973/1979 crises. Only Congress can do that.

Every once in a while something will give me a slight glimmer of hope that intellectual progress is actually being made. That the increase in the steel tariffs was rarely treated as anything but a naked vote buying scheme that harms the country as a whole is one of those things. Then we get this NYT headline: Cigarettes Cost U.S. $7 Per Pack Sold, Study Says.

Must we go over this again? Nothing in the story deals with the basic fact that by dying sooner smokers save Social Security money. Does reporting on this study even serve a purpose when that basic point (which might well be refuted, or otherwise dealt with) isn't even brought up?

Even aside from the net monetary benefits and cost calculations, so what if they do? Higher medical costs are only "social" problems because the government chooses to subsidize medical care. When the patient pays for his own medical care (in this case, even via insurance, as long as insurance companies are allowed to place people into different, appropriately charged, risk pools) higher medical bills are private issues. Smoker's wouldn't cost "society" more. They'd cost themselves more.

In general, arguing that the government should be able to ban actions because they increase the the costs of government programs (not a necessary implication of this specific study, but you can see the direction) mis-understands the economic principle. Econ 101 teaches that subsidizing an activity in a way the prevents the consumer from seeing the full costs of his actions will occasionally lead people to take actions even though the true costs exceed the benefits.

This is the most obvious example of the general point that insulating decision-makers from the costs of their decisions (e.g., subsidizing activities) will perpetuate mistakes, by destroying the feedback mechanism alerts people to mistakes. But banning actions does the same thing in spades. It runs the great risk of preventing consumers from making good decisions just because some authority somewhere decided that it would probably be a bad decision, and neuters the feedback mechanism that would allow consumers to alter their behavior to reflect genuine costs and benefits.

Ultimately the question isn't so much whether or not smoker's impose an additional cost upon society, but whether a government agency, with its decision dynamics, is in a better or worse position than the smokers themselves to decide whether that next cigarette is worth the addition health risk.

The below point notwithstanding, there is still plenty of confusion regarding the purpose of CAFÉ standards. Are they supposed to foster “energy independence”? Reduce pollution? Conserve resources?

It’s usually implicitly assumed that buying one gets all three, but that’s not necessarily true. Maybe the will conserve resources, but that’s not a given (that’s a discussion for a different day). It’s a commonplace that new cars pollute less than old cars, so increasing the cost of new cars increases pollution.

And what of “energy independence”? It seems to be assumed that reducing oil consumption = reducing imported (preferably, Middle Eastern) oil consumption. But unless the Middle Eastern oil producers choose to reduce production by just the right amount to keep oil prices constant (not something that even would be in their best interests even if they had monopoly power), the reduction in consumption will come from the highest marginal cost producers. I don’t really know who those folks are, but I’m pretty sure they aren’t the Saudi’s. If US wells are the highest marginal costs producers, reducing oil consumption could very easily increase the percentage of consumption coming from foreign sources.

DEFENDING PAUL KRUGMAN AGAINST MEGAN MCARDLE! Well, not quite, but almost. Live at the WTC has a wonderful Econ 101 lesson (I’ve actually met people who couldn’t stand Econ 101…weird!) explaining why the people who want the government to goad people into consuming less gasoline should prefer a gasoline tax over increasing the CAFÉ requirements. Basically, raising the gasoline tax will cause people to cut back on gasoline consumption no matter what car they have, while forcing them to buy more fuel efficient cars makes driving cheaper, and, thus, you can’t conclusively predict what it will do to gasoline consumption.

Which is a very very good pedagogical point, and well worth the read. But realistically, just how elastic can the Price Per Mile Traveled (PPMT, read Megan’s piece) be with respect to the price of gasoline, which isn’t the sole component of the cost of automobile travel? The opportunity cost of time spent in the car, wear and tear on the car, routine maintenance, etc, all also play a role (and CAFÉ even increases the PPMT by pushing people into flimsier and less powerful cars :) ). So it’s not at all unreasonable to think that increasing automotive fuel efficiency would reduce gasoline consumption.

Of course, raising gasoline taxes would do a better job of reducing gasoline consumption. But, raising gasoline taxes isn’t one of the choices. CAFÉ enthusiasts could genuinely understand Megan’s point and still favor increasing the standards. Most of them don’t, I’m sure. But they could.