Saturday, May 26, 2012

When Prices Are Wrong, Markets Don't Work

This article appeared in The New York Times on March 19, 2012.

The one concept that all students, even those sleeping in the back of the lecture hall, learn from an introductory economics class is that prices matter. And more particularly, students learn that as prices increase, the quantity consumed goes down. So if fossil fuel combustion produces byproducts that cause negative health effects on third parties as well as changes in the temperature of the atmosphere, the obvious lesson from economics is to increase fossil fuel prices enough through taxation to account for these effects. Then firms and consumers will react to these prices in thousands of different ways, the net result of which is less aggregate fossil fuel combustion.

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