2008-2009 Essay Contest

second Place Essay—Advanced Economics

The Reluctant Role of Governments in Energy Markets


Martha Sebald
Minnetonka High School
Minnetonka, Minnesota

As a generation, we have become increasingly reliant on gasoline and fossil fuels to “run our lives.” We rely on energy for everything we do, driving to work, driving to school, driving kids to sports, heating and cooling houses, you name it. Following this massive increase of energy reliance is the question of the government's role within energy markets. People have also become increasingly aware of the effects of energy on the environment, and are actively pressuring their local politicians to “do something about it.” Even though some government intervention in energy markets is necessary to protect consumers as well as the environment, extensive amounts of intervention can lead to wasted resources and inefficient markets. Governments should pursue energy market intervention when it is necessary to protect the consumer from monopolized prices and pollution from industrial activity; however, they should avoid areas subsidizing new energy technologies.

In instances where the consumer is greatly disadvantaged by monopolies, it is good and necessary for the government to intervene. Energy companies are prone to forming monopolies because it is inefficient to work in any other manner. It is impractical to have, for example, 7 power companies connecting lines to each house to ensure competitive pricing. Therefore, monopolies typically form in many energy markets because of the high infrastructure costs of providing competitive energy. As a result, monopolies can be unfair to consumers because the customers have little or no choice of energy providers, and therefore have to pay the price set by the monopoly. Governments need to regulate the price at which monopolies charge their consumers in order to insure relative protection from the energy companies, that might otherwise charge exorbitant costs.

Another negative consequence of industrial energy producers is pollution and waste when not regulated. Industrial energy producers are prone to pollute the water, land, and air 2 more when there is no regulation. The complete cost of their polluting is rarely fully accounted for because it is almost always cheaper to pollute and maximize profits in the short run. When pollution goes unregulated, there are many negative health consequences to the consumer that are not redressed or paid for by the energy companies. The pollution damages civilians' health and increases their healthcare costs at no expense to the polluter. In China, currently the world's greatest energy producer, 70% of the electric power is drawn from burning coal. This contributes to 80% of China's carbon dioxide emissions, carbon emissions being one of the greatest causes of pollution. These emissions have had serious health impacts on the population, including increased birth defects in newborns (Pastemack). The government needs to regulate pollution in order to protect citizens from its damaging effects and penalize energy producers for their negative impact on the population and environment (when unregulated).

Although government regulation is necessary and good for handling monopolies and pollution, government involvement in the subsidizing of "greener" energy technologies often results in more bad than good. Problems subsidizing the development of certain markets include wasting resources and inhibiting markets. A prime example of these negative effects of subsidizing is ethanol. In an attempt to create a much greener energy, bureaucrats devised a "cleaner" way to run our cars without calculating the possible problems that would accompany it. The government thought this was a great idea and began subsidizing ethanol production in the Midwest states. They thought this would benefit the local economy and decrease reliance on foreign oil. Investment was greatly encouraged in the process of ethanol production. However, demand did not develop as hoped, as it appears ethanol production is more expensive than originally guessed and few consumers buy it. Additionally, the process of converting the corn into ethanol is possibly emits even more pollutants than refining oil into gasoline. Another unintended consequence was that the higher demand for corn in ethanol production caused food prices to rise. Government's attempt to force a solution on the market created inefficient energy production and raised food prices for destitute people around the world. Overall, ethanol ended up being more expensive to produce than it was worth, as well as worse for the environment, the problem that was intended to correct in the first place. Researchers at the University of Minnesota "found that corn ethanol is worse for health and the environment than regular gasoline" and findings "identified as more costly … than even regular gasoline (Galbraith).

On top of that, many farmers and investors who became very excited at the prospect government subsidies to produce ethanol. However, many of those farms and firms have gone bankrupt in the past couple of years because the demand for ethanol did not develop. Government officials believed they were doing the earth a favor by promoting the switch to cleaner energy; however, they may have created even more problems than they originally intended to address. Overall, because of the government's subsidies in ethanol as a "clean" energy substitute for gasoline, the energy market was disrupted as funds were directed away from technologies that most efficiently to toward the production of an unproven product that lost money and tax payer dollars.

While government intervention is necessary in some areas of energy markets to prevent monopoly pricing and regulate pollution, it should avoid interference by subsidizing new energy technologies. Alternatively it may be appropriate for governments to research certain sustainable or renewable energy products, but the governments should let the market choose what is to be done with the outcome of that research. On the other hand, in order to protect its citizens from the dangers of unregulated pollution or monopoly pricing, the government should intervene to regulate pollution and monopolies to ensure that consumers are not greatly disadvantaged. This system will produce the most efficient and safe market for the citizens and the producers.

References

"Denmark's Energy Policy 2008-2011." Denmark. 14 Jan. 2009. 28 Feb. 2009.

Galbraith, Kate. "New Study Tallies Corn Ethanol Costs." New York TImes, 5 Feb. 2009. 1 Mar. 2009.

Nothstine, Ray. "The unintended consequences of the ethanol quick fix." The Christian Science Monitor 27 July 2007. 2 Mar. 2009.

\Miller, Peter. "Saving Energy: It Starts At Home." National Geographic Feb. 2009: 60- 81.

Pasternack, Alex. "In China, Pollution Causes Two Birth Defects A Minute: Official." Treehugger.com. 2 Feb. 2009. 1 Mar. 2009.

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