Megnut

When market caps are a good thing

An interesting article in the Sacramento Bee attempts to explain how California deregulation happened in the first place. Sounds like there were people waving red flags but lots of folks chose not to listen. The descriptions of the politicians and commissioners reminded me of Atlas Shrugged. In the attempt to pave the way for a brave new world of electrical power, of "Power to the people and by the people," they created a system that couldn't work. Of course, in Atlas Shrugged, Rand has politicians and commissioners hobble the market in the other direction, but the similarities are there. (Thanks to Erik for sending in the link.)

Erik also sent a link to an Economist article, "Energy prices- When caps do not fit" but you need to be a subscriber. Of course their stance is rather traditional and expected: No Price Caps. The Economist argues we must bear the brunt of our decision and let the market sort itself out and that creating price caps will do nothing to solve the root of the problem: insufficient supply. To that I say, "Maybe."

If it were truly a case of limited supply I too would be concerned about price caps because there's no incentive for suppliers to invest in increasing capacity (building new plants, upgrading lines, etc.) But I suspect the problem in California is restricted supply: providers are withholding and not producing to capacity in order to drive up prices. They're taking advantage of the market. And price caps would prevent that behavior.

I love the free market, but I also believe that a government has a responsibility to protect its citizens. If we allow an unchecked market, we allow for extremes: very very rich people and very very poor people. Price ceilings and price floors (such as minimum wage) prevent us from a "survival of the richest" existence. And this is one situation where I think short-term price caps are necessary. At least until we get this mess straightened out. And enough about that!

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