[Hint: You can get around The Economist‘s paywall by linking via Google – just put the URL into Google, then click on Google’s link to the article.]

Last month there was a story about various dirigiste steps the Japanese government might take to deal with the post-tsunami electricity shortage in The Economist (of all places).  They published my response in the May 14 issue, again with some unfortunate editing (see “The market for electricity”, halfway down the page).  Here is my original version:

Date: Sat, 07 May 2011 19:06:22 -0400
To: letters [at] economist.com
From: Dave <dave [at] mugwumpery.com>
Subject: Or, you could let the market work

Dear Sir:

I agree with your assessment (“A cloud with a green lining”, 30 April) that Japan’s government has many options to deal with the electricity shortage resulting from the earthquake and tsunami.  As you say, they could encourage solar power, subsidize LED lighting, push for batteries to shift demand away from peaks, etc.

Alternatively, they could do nothing at all, and allow electricity users to bid up the price of power until demand drops to meet the limited supply.  The resulting high price would by itself encourage alternate sources of supply and force conservation without any need for “publicity” or nagging.   More, it would encourage people to find clever ways to increase supply and reduce demand that the mandarins in Tokyo might never have thought of.

And all without costing taxpayers a penny, or feeding subsidies to the politically-connected.

The sad thing here (on top of the greater tragedy of the earthquake itself) is the lost opportunity for entrepreneurs to come up with efficient and innovative solutions to address the electricity situation.

But the market works even when governments attempt to suppress it – just less efficiently. If the Japanese government decides to dole out subsidies and propaganda instead of letting the electricity price rise, that won’t end the shortage. Rolling blackouts will still cause electricity consumers to increase their own electricity supplies, and adapt their demand to the blackouts, by buying their own generators, investing in battery storage to supply power during down-times, etc. But there will be a lot less incentive to cut consumption, since cheap power will still be available in bursts.

Eventually the Japanese electric grid will be rebuilt to handle the demand, but in the meantime adaptation will be slower, and the pain more prolonged, than it would be had the authorities let the market do its thing.  But despite the best efforts of the government, electricity users will adjust and find ways to get by with the limited supply.  And that is the market in action.

One Response to “Or, you could let the market work”

  1. Bob Says:

    My next door neighbor at my vacation home used to be the CEO of a major electric company. He considers himself a staunch conservative. I found myself in a discussion with him about deregulating electricity (shortly after California’s experience with that). He thought it could never work: electric companies would not maintain the ability to handle peak loads unless the government forced them to.

    I was stunned. He supports the free market in other areas, but here he was saying there was no way the free market could get electric companies to provide good service to their customers.

    There are, of course, several arguments I could’ve made to him. But I didn’t want to risk an acrimonious argument with a good neighbor, and it would’ve been the height of arrogance for me to lecture a former CEO of an electric company on the possible workings of the electricity market.

    But it certainly illustrates how hidebound people’s thinking can be. He spent his career in a heavily regulated industry, and he can’t think outside the box.

Leave a Reply