Jewish World Review March 26, 2001 / 2 Nissan, 5761
http://www.jewishworldreview.com -- HAS anyone ever pleaded with you not to buy a Rolls Royce? The argument might go like this: So much expensive materials and so many man-hours of highly-skilled hand labor go into producing a Rolls Royce that, if everyone had one, it would drain so many resources and so much labor from the economy as to lower our national standard of living.
It is a legitimate argument, but why have you never heard it? Because all such arguments are summarized in the price tag on a Rolls Royce. That price tag -- in the hundreds of thousands of dollars -- is far more convincing than any exhortations.
Look at it another way: What does it mean when politicians, the media and miscellaneous busybodies exhort you to do or not do something? Often it means that what they want you to do or not do does not carry a price tag sufficient to cause you to behave as they think you should. Prices are based on the actual supply and demand, while exhortations are too often based on fashionable notions, rather than hard facts.
Currently, Californians are being exhorted to conserve electricity. But the same people who are making these exhortations are opposed to letting the price of electricity rise to a level that would cover the cost of generating electricity -- and therefore make exhortations unnecessary. Last year, rising prices had already caused Californians to reduce their consumption of electricity by 9 percent, when the state legislature imposed lower electricity prices -- and electricity usage then rose.
Price controls almost invariably lead to consumers demanding more and suppliers supplying less. It is a guaranteed formula for creating a shortage. But, despite a worldwide history of such economic responses, politicians are often tempted to play the role of rescuers, despite the even bigger problems that can create.
One of the reasons for the rescue this time was that the average electricity bill of $68 a month in southern California had risen to $120. While that is a large percentage increase, $120 is about 10 percent of what these same people were paying to rent a two-bedroom apartment. But it was considered unfair because it was unusual.
Electricity costs more to produce than what California "consumer advocates" and politicians are willing to call "reasonable" prices. Some of the prices charged by out-of-state power generators who sell electricity to California when the local supplies are insufficient are much higher than the "normal" price charged for electricity, leading to angry accusations of price "gouging" or "exploitation." But the cold fact is that there is no such thing as "the" cost of generating electricity.
When you wake up in the middle of the night and turn on the light, the cost of supplying you that electricity is practically nothing, because the whole system is operating far below its capacity while millions of people are asleep. But when you turn on your air conditioner on a hot summer afternoon, while millions of other homes and offices also have their air conditioners on, that is straining the system to the limit, and the cost of generating additional electricity at that point may be several times what it would be in the middle of the night.
There are many ways of generating electricity and the cheapest way is likely to be used to meet the normal demands, while smaller and less efficient generators are kept as standby reserves for emergencies. When so many people start turning on their air conditioners at the same time that the regular generators can't handle it any more, then the high-cost generators kick in, to keep the whole system from collapsing into blackouts.
When the weather creates extra heavy demands for electricity in California -- whether for air conditioners in the summer or electric heaters in the winter -- the same thing may be happening in adjoining states from which California buys the additional electricity needed. Maybe Nevada has enough electricity-generating capacity to meet its own needs, but can only generate the additional electricity for California by resorting to high-cost generators that are usually on standby.
If the real cost of that expensive electricity were passed on to California consumers, no
exhortations to conserve would be necessary. But it is much easier for activists and
politicians to demagogue and blame others for California's refusal to build its own power
plants, lest these plants "spoil" the habitat of some toad or bug. That is why there are
JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, Basic Economics: A Citizen's Guide to the Economy.