This is how a market is supposed to work—or not

Posted: 30 May 2012 in Uncategorized
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It’s not often that I write admitting the validity of the mainstream story about markets. But the case of the Big Sandy power plant is a good example of how that story is supposed to work. The relative price of coal rises, based on environmental regulations and the declining price of alternative sources of energy, and the owners of Big Sandy decide to switch from coal to natural gas.

The decline is largely because new pollution rules have made coal plants more costly, while a surge in production of natural gas through the process of hydraulic fracturing, known as fracking, has sent gas prices plummeting. Together, the economics of coal have been transformed after a century of dominance in Washington, state capitals and the board rooms of electric utilities.

“The math screams at you to do gas,” said Mr. Morris, whose company is the nation’s largest consumer of coal.

Price-induced substitution among inputs in action!

But then there are all the other parts of the story that are usually missing from the mainstream account. Litigation, lobbying, contributions (to politicians and environmental groups), and advertising by both Big Coal and the natural gas industry. The attempt to pass on the cost of environmental retrofitting to electricity consumers. The negative effects of coal mining on miners and local communities and the negative effects of fracking on a different set of local communities. And so on.

In other words, what the mainstream story misses is perhaps more important than what it captures: poverty and unemployment make it difficult for miners and local landowners to survive without coal or natural gas, while large corporations vie for control over markets and energy policy.

That’s how a market works in the real world.

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