Price controls

[Jet]

Despite Economics 101, not all price controls cause disasters.

In California, the energy crisis was caused precisely because of the lack of price controls. Basically, Paul Krugman explains that in the relevant economic model demand is constant at, say, 900 GWh, below, say, a price of $1000 per GWh. Now, there're 5 energy-producing firms that can produce up to 200 GWh of energy at a cost of $20 per GWh. This gives each firm an effective monopoly on 100 GWh, so it's in the best interest of the firms to charge $1000 per GWh; price controls that reduce that to, say, $30 per GWh don't reduce supply at all, in this case.

Now, suppose that we have a minimum wage situation, by which equilibrium wage is $5 an hour, and demand and supply for low-wage labor at this level are 1,000,000. Further, suppose that demand and supply are not very price-sensitive, so an increase of 1% in wages (i.e. 5¢) will reduce demand for labor by only 0.1%, i.e. 1,000 workers. This situation applies to almost all firms that make large profits; those closer to breaking even will reduce their low-wage labor by a proportion roughly equal to the increase in wages, so the model doesn't apply to them. Now, what if the government increases minimum wage to $6. In this case, 20,000 workers will be put out of work.
Here's where welfare comes into play. Whenever change in demand is lower than change in price, the total amount of profit (in this case wages) increases as prices increase. So the total amount of money low-wage earners make increases from $5,000,000 an hour to $5,780,000 an hour. In other words, appropriate taxation can return the full $5 an hour to the 20,000 put out of work if the government wishes, while still maintaining above-equilibrium wages.

[gregh]

I havn't studied the energy crisis over there a lot, which a sad thing because I try to be up to date on most major problems.

There is certainly a problem though, and something needs to be done about it. I suspect it is all through various government contracting, but like i said i have not researched it. I think there comes a time when people just need to work together a bit and try to solve the problems. I'll try to research this one up a bit sometime and provide a more insightful post though.

[Jet]

Originally posted by gregh, I havn't studied the energy crisis over there a lot, which a sad thing because I try to be up to date on most major problems. There is certainly a problem though, and something needs to be done about it. I suspect it is all through various government contracting, but like i said i have not researched it. I think there comes a time when people just need to work together a bit and try to solve the problems. I'll try to research this one up a bit sometime and provide a more insightful post though.

Well, the energy crisis was caused by just that - deregulation. Davis' contracts with Enron only came afterward, resulting in a completely different problem, but that's beside the point here.

[GreatWyrm of Babylon]

Maybe those that do not know the real situation will buy that load of BS.

If the problem was too much profit, why was CA having to import electricity. You got a line to cover that one?

[white rice]

Originally posted by GreatWyrm of Babylon, Maybe those that do not know the real situation will buy that load of BS. If the problem was too much profit, why was CA having to import electricity. You got a line to cover that one?

NIMBY-Not In My Back Yard

People supported the idea of less polution by opposing new power plants made in California while on the other hand increasing demands in energy and transportation. It's the classic example of the electorate wanting their cake and eating it too.

What BS is there? Oligarchies have a greater temptation to collude and to interfere with market conditions. The original intent of decentralizing energy was so that Californians could by energy at the best available price. That was definitely not the case, and with the NIMBY effect, they couldn't rely on their industries within their borders.

Note- there isn't an energy shortage in CA now because new gas plants have been built. Not because of some great Enron reform.

[GreatWyrm of Babylon]

Gotta love the polarization around here. Everyone assumes that if you object to an issue that they know how you think. Enron may have got trashed so that California would not have to pay them back, but other than that, what does Enron have to do with anything? I was reffering to the electricity plants here in Texas that California promised to pay for the power being produced, but they were old plants and had to pay fines just to operate. So California was just fine with paying green fines to pollute Texas in order to get around the green fines in their state. Then they voted down the budget and refused to pay those plants.

[white rice]

Enron may have got trashed so that California would not have to pay them back, but other than that, what does Enron have to do with anything?

Enron and other energy companies like Dynergy and Reliant were major players in the price fixing scandal. They have largely settled without claiming guilt or innocence.
http://www.nctimes.com/articles/2004/04/16..._0412_09_59.txt
http://msnbc.msn.com/id/4695412/
http://news.moneycentral.msn.com/breaking/...0428&ID=3642272

Enron in particular was accused of manufacturing the energy scandal in the first place.
http://home1.gte.net/deleyd/bush/enronca2.htm

These companies used practices like shutting down plants on certain days and created congestion on powerlines to create the illusion of demand.

I haven't heard of your plants. Who owns them? Was it before the energy crisis or shortly after deregulation? I can only guess without further sources that it was after the crisis, so actual demand didn't need them, and contracts were more favorable stateside.

[GreatWyrm of Babylon]

linkI will have to get back on this link wants you to sign up.

[Autolykos]

Originally posted by Jet, Despite Economics 101, not all price controls cause disasters. In California, the energy crisis was caused precisely because of the lack of price controls.

Wrong. Wholesale electricity prices were deregulated, but retail prices retained price controls. From "How to Create an Energy Crisis" by Hans Sennholz, published in The Free Market, July 2001, Volume 19, Number 7:

"While consumer rates were set by the government, wholesale prices were to be negotiated from minute to minute at the PX [Power Exchange]. With retail prices fixed at roughly 12.5 cents per kilowatt-hour and wholesale prices soon soaring to 40 cents or higher, the utilities' losses mounted, approaching $15 billion, and forcing Pacific Gas & Electric (PG&E) to file for Chapter 11 protection on April 6 [2001]."

The rest of the article can be viewed here: http://www.mises.org/freemarket_detail.asp...der=articledate

- Rob

[Jet]

The model still holds, because the relevant corporations could hardly give a shit about retail prices, considering that they're paid in wholesale.

[lostkiwi]

The energy crises was caused by the deregulation of one segment of the market with out the corresponding deregulation of another.

In this case the deregulation of the sale of electricity was deregulated but its production and especially its transportation were still heavily regulated by federal and state authorities.

This is not a free market, this is a hodgepodge of laws and regulations that was set up at the beginning to fail.

As for minimum wages and welfare, you’re supposing it is ok to cover up a mistake by stealing from the masses to pay off those that are harmed. Your argument here just flawed on so many levels. My first question I suppose is where does the extra $780,000 come from? By adopting a minimum wage that is set above the wages a market calls for you are forcing businesses to either lay off workers or raise the price of the goods they are producing. So now everyone who is still at work in these low-income jobs seems to be making a little more but everything they buy now costs more. On top of this you are proposing that everyone pay taxes to keep the people laid off (because of your minimum wage) from working, there by cutting into peoples pay just that much more.

Now what exactly was broken before you started to try and fix things again? I don't remember.

[dismal]

Originally posted by Autolykos Wrong. Wholesale electricity prices were deregulated, but retail prices retained price controls.

Exactly right. With retail prices capped there was no demand response due to escalating prices.

Economics 101 will tell you that a price capped lower than the market clearing rate will lead to apparent shortages. The reason this doesn't happen in electricity is that utilities have an obligation to serve. Edison and PGE were regulatorily required to buy power and sell it at a lost, which of course drove them into dissolvency and caused a credit crisis on top of the power crisis.

So you had:

- Capped retail prices (no demand response)
- Obligation to serve (demand passed though into wholesale market)
- Partially deregulated wholesale prices

A regulatory recipe for disaster. Then, the situation is made worse by a lack of new construction inside California and a high reliance on importing power from outside the state.

Gray Davis famously said "I could solve this problem in 10 minutes by raising price". He was right. He chose instead to make a political issue out of it, and did a great disservice to the people of California. Good riddance.

[Jet]

As for minimum wages and welfare, you’re supposing it is ok to cover up a mistake by stealing from the masses to pay off those that are harmed.

All money that is "stolen" comes from the additional benefits that minimum wage pays; hence, from the point of view of the poor, this is a win-win situation.

As for increasing prices, as firms always have large expenses beside paying wages to low-wage workers, the increase will not come near the increase in wage for the poor.

[Leopard]

Originally posted by Jet, Despite Economics 101, not all price controls cause disasters.

distasters? maybe not - thats a pretty subjective term. But ALL price/wage controls DO interfere with the natural market and step on basic individual rights if not outright causing harm.

Now, suppose that we have a minimum wage situation, by which equilibrium wage is $5 an hour, and demand and supply for low-wage labor at this level are 1,000,000. Further, suppose that demand and supply are not very price-sensitive, so an increase of 1% in wages (i.e. 5¢) will reduce demand for labor by only 0.1%, i.e. 1,000 workers. This situation applies to almost all firms that make large profits; those closer to breaking even will reduce their low-wage labor by a proportion roughly equal to the increase in wages, so the model doesn't apply to them. Now, what if the government increases minimum wage to $6. In this case, 20,000 workers will be put out of work. Here's where welfare comes into play. Whenever change in demand is lower than change in price, the total amount of profit (in this case wages) increases as prices increase. So the total amount of money low-wage earners make increases from $5,000,000 an hour to $5,780,000 an hour. In other words, appropriate taxation can return the full $5 an hour to the 20,000 put out of work if the government wishes, while still maintaining above-equilibrium wages.

Sure, one can always find a situation which fits their world-view. BUT, wage controls affect the ENTIRE market unless you propose to delve further into market segments and impose differing wage controls depending on how the demand/supply for labor in that industry is acting at that moment (this is a constantly varying quantity notice). Even if the immense effort to micro-manage labor wage minimums were able to pay for the bureaucracy <sp?> to accomplish this monumental task, the end result would be a great misdirection of labor and capital all in the interest of perpetuating a certain arbitrary amount of taxation - one must come to wonder why.

You do understand that a 'managed economy' is naturally inefficient?
The economy happens to manage itself and better if left alone - those folks in government who show such propensity to control others should instead turn their efforts to perhaps computer programming - I know wherever I desire to play God, a bit of programming satisfies adequately.

[Autolykos]

Originally posted by Jet, The model still holds, because the relevant corporations could hardly give a shit about retail prices, considering that they're paid in wholesale.

Try reading my quote again. It explains itself.

- Rob

[Jet]

But ALL price/wage controls DO interfere with the natural market and step on basic individual rights if not outright causing harm.

If that's the same market that gave us the Gilded Age and the Great Depression, and if these rights include the right of the invisible hand to screw the workers, then I really don't have a problem with that.

The economy happens to manage itself and better if left alone

IT does, but it does that badly: quality of life is crappy for the bottom 80-90% of the population, and there's a serious depression once in a while.

[Leopard]

Originally posted by Jet, If that's the same market that gave us the Gilded Age and the Great Depression, and if these rights include the right of the invisible hand to screw the workers, then I really don't have a problem with that. IT does, but it does that badly: quality of life is crappy for the bottom 80-90% of the population, and there's a serious depression once in a while.

sorry Jet, the great depression was directly caused by the immense credit expansion policy the Federal Reserve had throughout the 'roaring 20's'

the 'invisible hand' does not screw workers or anybody

the quality of life increases greater under a free market ESPECIALLY for those on the bottom rungs of 'society...

you worried about a 'serious' depression? I am sure your dreams will come true soon enough if hte fedGov continues its current course.

michael

[Jet]

How about the 1890s' depression? Besides, it should be self-evident that growth has been higher and more consistent since the government discarded laissez-faire. And that's without getting into worker protections, which began 30 years before the Great Depression.

[GreatWyrm of Babylon]

The Great Depression, the favorite mantra of the Socialist Party as proof that capitalism is a failure. You might want to check out the PBS documentary on that, it is actually fairly accurate. The stock market was going great, people were placing stocks up as collateral to buy more stocks, and the banks were giving loans on the expected returns on those stocks.

Then there is the Federal reserve:
The first thing it did was to inflate the money supply by about 60% during the 1920's.
Second, there are indications that the economy was starting to cool off on its own in early 1929, thus making the interest rate hike in TBD completely unnecessary.
The third mistake the Fed made was in early 1931, when The Fed raised interest rates, exactly the wrong thing to do during a contraction.
Fourth, the Fed decided to 'correct' for all the additional money handed out in the 20's by not printing additional money when gold was recieved from Europe and Asia for the purchase of food.

None of the above were caused by capitalism, they are caused by ignorance.

[Jet]

You still haven't accounted for two things. One, the 1894 depression. Two, the fact that the Depression should've ended without any governmental intervention according to Classical theory, but it didn't.