Make Sensible Energy Decisions
Atlanta Journal-Constitution
Sept. 6, 2001

Congress may not be worrying about the availability of energy supplies at this moment. But if our congressional representatives decide energy is a problem, they’ll want to do something about it.

What are they likely to do?

First, impose more caps on prices, then enact policies to achieve the right balance between production and conservation.

But no one knows what would constitute an appropriate balance. This is not a problem, however, unless we don’t decide to treat it as a problem and turn it into one.

The information needed to balance production and conservation does exist. It is possessed in bits and pieces by millions of people and can be tapped to inform decisions if only legislators and regulators resist the urge to control energy prices. In imposing price controls, we destroy valuable information and enshrine ignorance as the basis for our energy policy.

Some of the knowledge required for sensible energy decisions rests with experts on the technical details of recovering energy resources, converting them into usable energy and distributing it to users. This information is possessed by tens of thousands of people scattered around the world, few of whom have direct contact with each other. Yet somehow, all of it has to be collected, given proper weight and communicated to those who can make best use of it.

Equally important is information that has nothing to do with expert knowledge and is even more widely scattered. This is the information that millions of people have on their particular circumstances.

Some can easily take public transportation to work, while others cannot. Some could live with a wider range of indoor temperatures, while many older people and those with health concerns need more constant temperatures.

Some people simply prefer brightly lighted homes and are willing to sacrifice other things to keep the lights on at night. This information is not only more fragmented and dispersed than expert information, it is highly subjective and impossible to articulate precisely, if at all.

It is impossible for Congress—or any other group—to obtain and make good use of even the smallest amount of this highly personalized information, but it is as essential to sound energy choices as the scientific knowledge experts possess.

Fortunately, there’s no need to collect all this information in one place so it can be run through a computer to determine the right amount of energy production and conservation.

The information needed to make sensible energy decisions can be transmitted by those who have it to those in the best position to respond to it, and communicated in a way that motivates appropriate responses, through market prices—assuming this price communication is not censored by politically imposed caps.

Market prices allow consumers to inform producers, and each other, how much they value different energy uses. They also allow producers to inform consumers how much it costs to provide different types of energy.

In response, consumers will conserve energy in ways that minimize their inconvenience when the cost to them is less than the value of the energy saved. Producers will increase production of energy sources that provide the most value to consumers for the cost required and will expand those sources as long as consumers value the additional energy by more than the value sacrificed to produce it.

Even without price caps there is no guarantee market activity will result in exactly the right amount of energy conservation and production. But the decisions made in response to the information provided by market prices are sure to be far better than those made by public officials in an informational vacuum of their own creation.

—Robert D. McTeer, Jr. and Dwight R. Lee

About the Authors Robert D. McTeer, Jr., is president and CEO of the Federal Reserve Bank of Dallas. Dwight R. Lee is a Ramsey Professor of Economics for the Terry College of Business at the University of Georgia.