Free markets can adjust

From Charles Wheelan’s engaging Naked Economics:

Periodically the oil minsters from the OPEC nations will meet in an exotic locale and agree to limit the global production of oil. Several things happen shortly thereafter: (1) Oil and gas prices start to go up; and (2) politicians begin falling all over themselves with ideas, mostly bad, for intervening in the oil market.

As Wheelan describes, how individuals respond on their own to the higher prices serves to address the issue of high prices – without any intervention. The market does it on its own:

But high prices are like a fever; they are both a symptom and a potential cure. While politicians are puffing away on the House floor, some other crucial things start to happen. We drive less. We get one heating bill and decide to insulate the attic. We go to the Ford showroom and walk past the Expeditions to the Escorts.

When gas prices approached $4 a gallon in 2008, the rapid response of American consumers surprised even economists. Americans began buying smaller cars (SUV sales plunged while subcompact sales rose). We drove fewer total miles (the first monthly drop in 30 years). We climbed on public buses and trains, often for the first time; transit ridership was higher in 2008 than at any time since the creation of the interstate highway system five decades earlier.

As a result of changing consumption patterns, the price starts to fall on its own. Just beware that not all consequences of changing behavior are healthy:

Many consumers switched from cars to motorcycles, which are more fuel efficient but also more dangerous. After falling steadily for years, the number of U.S. motorcycle deaths began to rise in the mid-1990s, just as gas prices began to climb.

 

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