Price, conservation, and natural gas

Lynne Kiesling illustrates an important general point about prices in the particular case of the coming 'natural gas crisis'. On her blog, she posts the conclusion to her TCS article on the subject, which is spot-on (so I'll shamelessly lift the whole blog post, emphasis mine):

Price increases transmit valuable information to consumers that enables them to decide when it is worth it to them to conserve. Price increases serve as the most effective inducement to conservation, because they signal to consumers large and small that the relative value of natural gas has increased. They also tell suppliers when it is worth bringing more to market and when to invest in more capacity, and through this interaction across time and place, fuel portfolios become more certain and prices become more stable. Government removal of obstacles to this vital transmission of information through market processes is the most productive and constructive action that governments can take in the face of this impending "natural gas crisis".

Prices are very valuable information transmitters, which simultaneously package demand and supply information together in one ratio (of money-to-commodity/service), which in turn helps coordinate activity on both sides of the market (those who would buy, and those who would sell). Disruptions to the natural price signals leads to miscommunication and thus misalignment between supply and demand.

To digress a bit, interest rates are the same as prices, except that interest rates simultaneously provide information about the supply and demand of savings/investment funds/capital, as well as people's time preferences for consumption. When interest rates are manipulated and driven from their 'natural' position, you get miscommunication and thus malinvestment in the economy- which is much more general and severe than when a particular commodity market gets sent out of whack by price manipulation.

The answer, of course, is to let both signalling mechanisms work as 'intended' (or, rather, according to their nature, since neither prices nor interest rates are systems derived from human design), which will properly coordinate society to meet individual needs.

Share this