Wednesday, March 2, 2011

Bacon-wrapped Prices

In the video below the fold, Dr. Horowitz discusses the role of prices in improving natural resource conservation (HT: Mises blog). We have been worried about peak wood, peak copper, and peak oil for centuries. As goods become and became scarce, their prices rose. That signaled to producers that they needed to 1) use what we had more efficiently, 2) find more of it, and 3) find substitutes. The pricing mechanism worked as England ran out of wood leading to the discovery of coal, in the US for copper (discovery: fiber optic cables), and many countries and industries are actively looking for substitutes for oil.

Best quote: "Prices are an incentive wrapped in knowledge." If only we could wrap prices in bacon, market mechanisms would be a lot more popular. (I can see the t-shirt now... or at least guess who would make it.)

Of course, what the video misses is that market prices don't reflect externalities. If they did, prices would be higher to discourage consumption and encourage activities 1 and 3, but the higher prices would not necessarily encourage 2.

Disclaimer the FCC wants me to put on here every so often: I am not paid by or receive compensation from any site I link to. If I ever am, I will so note.

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