Thursday, July 12, 2007

The True Price of Gas

I have been devoting much of my free time recently to looking into energy policy – particularly on alternatives to fossil fuels. In general, I have to say that I am not impressed with many of the ideas for promoting alternatives to fossil fuels. However, I fear that if I launch immediately into a criticism of those policies, people might mistake me for an apologist for the oil industry. So, let me block that assumption right away.

If I was named energy czar, I would seek to implement a simple energy policy that would take the decision making out of the hands of the legislature and put it into the hands of the free market.

[I can hear the confused reader gasp, “What? I thought you were going to block the assumption that you are an apologist for the energy industry!”]

One of the principles of a free market is that you have to pay for what you use. Obtaining goods, while forcing other people to pay the bill, is generally known as a subsidy. Subsidies distort the market.

The value of a free market is that it carries a tremendous amount of information and it ties incentives for behavior to that information. We want people to refrain from activities that have a high cost on others, and to engage in more activities that provide benefits to others. A free market carries that information because it internalizes the cost. If my activity imposes a cost on you, then I need to compensate you for those costs. If my activity provides a benefit to you, then, in a free market, I can deny you the benefit of that activity until you pay me for it. In general, this combination of information and incentive, properly applied, promotes actions that fulfill the desires of others and inhibits actions that thwart the desires of others.

Desire utilitarianism and capitalism are very compatible systems.

When people are able to engage in activities that impose a cost on others, without paying for those costs, then this is a subsidy. It is also a form of theft. These types of distortions in the market reduce the incentive to avoid behavior that does harm to others. In fact, given the size of the incentive, it might even encourage people to do things harmful to others.

Many big businesses, while they use the terms ‘capitalism’ and ‘free market’ for public relations purposes, invest huge amounts of money in policies that distort the market, allowing them to engage in behavior harmful to others without paying a penalty, effectively obtaining a ‘subsidy’ from the victims harmed by their actions.

In fact, much of the inequality in wealth and power in the world today is not the result of ‘market forces’. It is a result of people with a great deal of money investing it in legislation (and legislators) that permit them to engage in behavior harmful to others without paying the cost – and sometimes even getting the government to pay them to engage in behavior that is harmful to others. The ‘others’ being harmed, of course, are those who cannot afford to buy a legislator of their own.

Some of them, of course, pass their subsidies on to their customers. When Exxon-Mobile obtains a multi-trillion dollar subsidy to the price of gasoline (allowing it to obtain oil without paying the true cost of oil), it passes much of that on to the driver buying gasoline for his SUV.

We would have to imagine something slightly different, if we were to imagine people paying the true cost of fossil fuels.


For example, imagine a driver, having filled up his SUV, walking into the convenience store to pay for it. He hands the clerk a credit card, who rings up the gasoline at about $3.00 per gallon. The clerk then says to the customer, “I’m sorry, sir, you are out of credits. I can take $3.00 from your credit card, but you’re going to have to come up with something to cover the additional costs.”

The customer then fumbles through his wallet, looking through a stack of coupons. He picks a coupon – one that shows a family standing in front of their house. The house has been in their family for a couple of generations now. “Take the house; that should cover my additional costs. And, while you’re at it, take the grandfather as well. Put the credit on my account.”

He has other coupons in his wallet.

Some of the coupons simply allow the clerk to take the costs out of the bank accounts of other people. Those other people will have to pay for his gasoline through higher taxes, which will go to provide the services, that get the gasoline to the pump.

One shows a soldier in uniform. The coupon allows the taking of one arm and one leg in a conflict meant to secure some other country’s oil supply for American use. Another coupon also shows a soldier, but offers the soldier’s life in exchange for gasoline credits. Typically, drivers do not pay these costs. A third coupon shows a village in Africa, its crops ruined by drought, its people starving and dying of thirst. By using these coupons, the individual shift the costs off his or her actions onto others and expect those others to pay the cost, allowing them to take only $3.00 per gallon out of their own bank accounts.

Vault Loads of Coupons

The SUV owner has only a few of these coupons. Exxon-Mobile and other companies have vaults full of them. Whenever they need a few billion dollars, they cash in coupons for the destruction of whole counts and even some nations. They are permitted to go to their bank, coupon in hand, and exchange a whole hospital full of patients for a few tens of millions of dollars.

Of course, they give away a few of these coupons to the SUV owners. This is a bribe for the SUV owner to vote to protect the oil company. “If you vote to end this trade, then you will no longer be able to pay for part of your gas by destroying the life, health, and property of others. If you lose this political battle, you will have to pay the whole price of gasoline yourself.”

There are some who argue that forcing people to pay for the true price of gasoline would be bad for the economy.

It is as if they are saying that the destruction of homes, limbs, and lives is somehow good for the economy. The types of subsidies that I am talking about are the type where somebody is going to have to pay the cost. The question is, who will do so?

The propaganda machine from the large companies that hold these vaults full of coupons, and the politicians who mimic these myths in exchange for political contributions, want to make us think that we are faced with a question of paying these costs or not paying them. The only way of not paying them is to end the activity that is causing the harm. Short of that, the question is not one of whether to pay these costs, but who pays the cost.

Are we going to have the person purchasing the gas pay the price at the pump? Or are we going to give them coupons that they can use to pass the cost on to others, in the form of property destroyed, health sacrificed, and lives lost?

Domestic Profits/Foreign Losses

There is one way in which we can argue that such policies would be “bad for the economy.” This situation applies to cases where the people who hold the bulk of these coupons are Americans, and the people who are on the coupons – the people that the coupon holder decides to sacrifice – are foreigners. In this case, using the coupons makes Americans wealthier by sacrificing the lives, limbs, health, and property of citizens of other countries.

This is exactly the situation that we see with respect to global warming, where Americans hold most of coupons, and the poor people in other countries will suffer most of the ill effects. If we give up this multi-billion-dollar business of destroying other countries for profit, then we will be economically worse off – and other countries will be economically better off. However, at some point, a person needs to ask whether he wants to be somebody who profits from killing, maiming, and destroying the property of others.

Arguing in favor of this system is to say that the SUV owner is perfectly within his moral rights to be using these coupons to pay for his gas – sacrificing the life, health, and property of other people to cover costs that do not come from his bank account, as long as the people he decides to sacrifice do not live in America.

Of course, we must ask how we feel about people in other countries who think that it is permissible for them to kill anybody in any country other than their own. What type of person would think this way?


There are, of course, some benefits associated with global warming. Some property in northern Canada and Siberia will become more valuable, and we may get a “Northwest Passage” across an Arctic Ocean that thaws in the summer. However, even these benefits can be understood in terms of benefits obtain by forcing others to pay for them. We can imagine the board of directors of Exxon-Mobile mailing out packets of coupons, allowing those land owners who receive them to pay for improvements to their property with the life, health, and well-being of others.

If it is truly a benefit to the people of Canada and Siberia to obtain these benefits, then perhaps they could see fit to compensate those who will suffer the costs, the way that a person who benefits from a gallon of gas pays the gas station owner for that benefit.

This analysis might sound somewhat harsh to some people. I cannot imagine anybody with any conscience paying for their gasoline with coupons that allow the store clerk to take the price by destroying the life, health, or well-being of others. However, it is no objection to a particular point of view that one does not like it. I hold that this does capture the moral dimension of these subsidies.

Yet, at the same time, many of the steps taken to use renewable energy are just as bad. Politicians are getting their hands into the fine details of the business. This is not because they want to promote energy efficiency. It is because they want to take the resources that go into energy efficiency and pass them out to their favorite campaign contributors. Unfortunately, when the government works in these ways, they are, in effect, taking resources that should be going to make the situation better, and diverting them to second-rate solutions.

In other words, they are not helping.


BlackSun said...


Fantastic analysis. The situation is exactly as you say. If only people had to face those families in other countries they were stealing from and killing. How much would you pay to not have the memory of some poor sick Nigerian child with no future etched on your memory as you pumped your gas. (Maybe that's a good use for those flat-screen displays on the pump. They should run stories about the warfare and devastation necessary to bring you your particular fillup.)

But sadly, our economic system deliberately hides those details from view. Which keeps us from realizing what bloodthirsty thugs we are.

We should be striving for transparency in all trade, and policies which promote fair-trade and basic worker's rights. There are literally millions of children forced into slave labor to make cheap products we buy every day. It goes far beyond gasoline--bad as that situation is.

People's conscience would not allow this nightmare to continue if they somehow were able to see it. Thank you for your efforts to raise awareness.

Anonymous said...

I wish you had written this a few days ago. You've done a much better job than I did when I tried to explain this very point to someone just the other day.

ADHR said...

Hm. This wasn't about what I thought it was going to be about! You're right, broadly, about the problems with how trade is currently implemented. FWIW, it's not just oil.

However, there is a comment right near the start of your post which I have to take issue with. You say: A free market carries that information because it internalizes the cost. This is false. Free markets don't internalize costs -- at least, not all costs. If they did, there'd be no such thing as an externality. Externalities are internalized in markets through regulation; and a regulated market is not, except in a distorted and weird sense, a free one.

Alonzo Fyfe said...


I am using the term 'free market' to mean a market in which all of the costs are internalized. Under this definition, there are no externalities and markets carry information about the effects of others.

Perhaps I should have used the phrase 'ideal free market' instead.

Psychols said...

By 'ideal free market' are you arguing that regulation and taxation are necessary extentions to the free market in order to turn it into an ideal free market? They seem to be the only way to internalize all the costs.

E.g. The dollars I pay at the pump should include some compensation for future generations who will be impoverished by the global warming created by my SUV. The only mechanism I can think of to accomplish that is an environmental impact tax.

Alonzo Fyfe said...

The difference between a free market economy and anarchy is that a free market economy has institutions set up to establish and protect property rights - including the rights that people have to their own bodies (their life and health).

If any given system allows one person to damage the life, health, or property of another without cost, then a free market does not exist.

Externalities exist where the system allows people to do harm to the life, health, or property of others with impunity. Therefore, where externalities exist, the fundamental principles of a free market economy are being violated.

The establishment of a system to establish and maintain property rights is a form of regulation. It is a (sometimes) complex set of rules governing who owns what, what it takes to transfer rights from one person to another, and when those rights have been violated.

It employs a bureaucracy to write the rules and a system of courts and judges to enforce them.

A person who says that they are for a system of property rights (for a free-market economy), but against government regulation, is advocating an insane contradiction.

A free market system is not the absence of regulation. It is the presence of a particular type of regulation which, it is claimed, is superior to other types of regulation.

I recognize that this is not how people are accustomed to using these terms in public discourse. However, that public discourse has been substantially confused by special interest groups who want to buy special priveleges to do harm to the life, health, and property of others without giving them compensation.

They have strong incentives to confuse the issue.

Alonzo Fyfe said...

By the way, I should add that I am not a free-market purists. As a desire utilitarian, I hold that the best system is the one that a person with good desires would support.

To the degree that free market systems best fulfill desires, it should be used. Where free markets fail to fulfill desires, it should be abandoned.

This will become evident in tomorrow's posting.

Anonymous said...

The Free Market is always superior to top down government and political actions.
We are very pleased to announce the creation of The Free Market Hall of Fame where members of the Freedom Movement will have the opportunity to initially vote on individuals contributing most to the success and advancement of free markets and free people around the globe during 2007. Mark Skousen stated; “It’s time we honored all the great teachers, writers, business leaders, legislators, and think tanks that have advanced the cause of liberty,"
Nominations for the Free-Market Hall of Fame are open to the public and can be made by anyone by e-mailing Individuals can vote for or nominate individuals who they believe should be in the Free Market Hall of Fame. Write-ins are permitted.

The categories will include the following academic economists, journalists and writers, business leaders, legislators and government officials and think tanks.

A select group of economists and other free-market supporters will make the final decision and vote on upcoming Hall of Fame members.

For more information on the Free Market Hall of Fame go to
Ron Holland, Editor
FreedomFest News