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Tuesday, September 13, 2005


Senators urge boost in standards of fuel economy


From the Washington Times:
"Congress should consider raising fuel-economy standards for all vehicles for the first time in 30 years in light of the gasoline shortages and huge spike in pump prices caused by Hurricane Katrina, key senators said yesterday.

'I believe we must take another look at the CAFE standards,' said Sen. Pete V. Domenici, New Mexico Republican and chairman of the Senate Energy and Natural Resources Committee, referring to the Corporate Average Fuel Economy rules enacted in the mid-1970s but not updated since.

'We looked at that before, and it was not politically possible. I'm not sure that will be the case after Katrina,' he said.

His comments came as the government reported that gas prices last week breached the $3 level for the first time on average nationwide, with the biggest increases seen in Mid-Atlantic states such as Virginia and Maryland, and in the District, where the average price for regular was $3.29 a gallon.

Republicans and Democrats both said they suspected price gouging as gasoline costs soared in the aftermath of Katrina, but they complained that the government doesn't have the ability to prevent such market abuses.

'The American people are being victimized more than any free market would warrant,' said Sen. Gordon H. Smith, Oregon Republican.

Mr. Smith and other senators at a committee hearing yesterday said regulators, including the Federal Trade Commission, are not aggressively pursuing price gouging and other market manipulation by energy companies reaping huge profits.

'There are growing concerns that oil companies are making too much in profits at the expense of consumers,' Mr. Domenici said.

Some relief at the pump is on the way as the prices of crude oil and wholesale gasoline dropped for a second day in New York trading, and are close to levels that prevailed before the hurricane struck the Gulf Coast, the heart of the nation's oil-producing sector.

Witnesses at yesterday's hearing said pump prices will remain high for weeks and possibly months, however, because the hurricane knocked out about 10 percent of production at oil wells and 5 percent of production at refineries that could take up to a half-year to restore. "
How can we use economic analysis to consider the public policy issues raised here? I can suggest some specific questions:

Is there a market failure justification for the national government mandating fuel economy standards for our vehicles?

Does the term "price gouging" have an economic meaning in general, and do you think "price gouging" is an accurate way to describe what has happened after the hurricane?

Is there a market failure justification for the national government to try to deal with "price gouging?"

It does not make sense for legislature to force higher standards on fuel economy.

It must remembered that businesses do not pay for expenses, such research and development. Businesses pass them on to the consumers in the marketplace. Therefore, it can be reasoned that they would continue this process and the consumers would be force to pay for the government mandates. Consequently, no relief will be given to the "energy crisis."

When you consider that today, an individual can either buy a Civic Sedan for about $18k or its Hybrid counter-part for $30k, the latter is the least cost effective. The monthly payment would be about 30% more. The gains made in fuel efficiency would be washed by the loan repayment.
The consideration of congress in raising the requirements for fuel-economy standards is a dangerous road to go down. It is not within congress' ability to dictate the manner in which manufacturers should build their cars. In order for one to make this stretch they would have to say that the "interstate commerce" clause applies to the manufacturing of vehicles. In the Supreme Court opinion of U.S v. E.C. Knight the court said "manufacturing is not commerce".

If congress were to raise the fuel-economy standards, the Supreme Court would have sufficiant grounds to overturn the law because of unconstitutionality. This is because the constitution gives congress the power to regulate interstate commerce which does not fall within the realm of standards requiring the production of cars which have a higher fuel-economy.

I am not suggesting that raising the fuel economy standards would not be beneficial for the environment or eventually beneficial for the country as a whole to be less reliant on foreign oil. It would definitely be benificial for those purposes however, it has the potential to have adverse effects on the economy.

As Kyle suggested this plan would not save consumers any money because it would come back to them in the pricing of the cars. Moreover, the role of government as a corrective state does not allow this type of intervention because there's no market failure occuring here. Fuel prices are at record highs but they themselves do not constitute a market failure. They are the price consumers must pay if they wish to drive their cars.

Consumers are free as always to choose cars with beter fuel ratings. If they wish to save money in the future or have concerns about the environment or the countries dependence on foreign oil; then they should invest in a more fuel efficiant vehicle.

Regardless, this decision should be made by the individual consumers, not the federal government.
I think it's a bad idea for the government to regulate the feul economy of cars for two reasons. Firstly, this is a market activity. People in the economy are going to react to a rise in gas prices by considering their opportunity costs and either limiting their gasoline consumption, or pursuing other substitute goods. The market will handle the changed price of oil on it's own. Secondly, the constitution gaurantees economic liberties in the fourteenth amendment. The language is as follows;
"Nor shall any state deprive any person of life, liberty, or property without due process of law."
Liberty, as referred to in the fourteenth amendment relates to economic liberty as well. People have the right to buy and sell the things that they wish to, at the prices the owners set on their own. If there were no regulation from the government in the first place, there would be no constitutionally granted ability to regulate prices set by a free market. People are not gauranteed certain prices by the constitution. They are gauranteed the liberty to react to prices as they see fit.
Another problem with instituting CAFE standarts is that The government would be hindering the natural correction our market diagrams would predict, and instead, the gov't would regulate the production of vehicles, not the price of gasoline. The market will equilibrate on it's own.
This proposition simply begs the question, "Is it legal for government to react to high, market set prices by regulating industry?" Constitutionally, and economically, the answer is no. Market failure would result from government interaction.
Price gouging does not have an economic meaning because people are going to react to ridiculously high prices by not paying them. They will consider other options, and the market will find the correct market price eventually.
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