Naive Energy Markets

44 Pages Posted: 24 Feb 2016 Last revised: 6 Dec 2016

See all articles by David B. Spence

David B. Spence

University of Texas at Austin - School of Law; University of Texas at Austin – McCombs School of Business – Department of Business, Government & Society; University of Texas at Austin - Kay Bailey Hutchison Center for Energy, Law & Business

Date Written: February 22, 2016

Abstract

One of the primary fault lines in the ideologically polarized American political environment is the question of when it is advisable for the state to intervene in the market. This ideological and partisan division dominates the field of energy law, a body of regulation that encompasses two basic challenges: (i) the problem of ensuring well-functioning energy markets, and fair energy prices, and (ii) the problem of managing the many and varied externalities associated with the production and delivery of energy. Economic thought has exerted tremendous sway over policy responses to these two challenges, as energy market regulation increasingly embraces competition and the logic and elegance of markets. At the same time, policymakers have sought to green energy markets through environmental and clean energy mandates. These two forces are in tension. Advocates of market solutions decry remaining economic regulation as “central planning” or “socialism,” and environmental regulation using the now ubiquitous “war on” language, as illustrated by the phrase “EPA’s war on coal.” The central claim of this article is that the hegemony of the modern, scientific version of welfare economics distorts our perception of the relationships between regulation and markets, in ways that traditional (classical) political economy did not. First, neoclassical economic models have difficulty fully accommodating social and emotional drivers of individual preferences that do not fit neatly into economic logic, or that otherwise make problems mathematically intractable; these drivers bear directly on the question of when governments should intervene in markets, and exist within a kind of blind spot in modern welfare economics. Second, while behavioral scientists have been working to understand that blind spot, their work still fights for acceptance within the discipline; more importantly, it is overlooked by politicians who use economic models selectively and instrumentally, cherry-picking the economics literature to influence policy in the “government versus markets” debate. This article uses energy law to illustrate how and why energy markets do not and cannot resemble the idealized markets of economic theory and free marketeers’ dreams. The economist’s goal of allocative efficiency misses notions of fairness and risk management that are vitally important to voters and policymakers. As a consequence, freer energy markets struggle with the problem of attracting sufficient private investment to ensure a reliable, reasonably priced energy supply, and the problem of managing (pricing, and allocating geographically) the externalities of those energy facilities. The disconnect between real and idealized markets explains why regulators continue to intervene in even the most deregulated and competitive American energy markets, in order to ensure a fair price of energy and to restrict the shifting of external costs from producers to society.

Keywords: Regulation, energy, law and economics

Suggested Citation

Spence, David B., Naive Energy Markets (February 22, 2016). U of Texas Law, Law and Econ Research Paper No. E563; KBH Energy Center Research Paper No. 2016-10. Available at SSRN: https://ssrn.com/abstract=2736499 or http://dx.doi.org/10.2139/ssrn.2736499

David B. Spence (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin – McCombs School of Business – Department of Business, Government & Society ( email )

2110 Speedway, B6000
CA 5.202
Austin, TX 78705
United States
512-471-0778 (Phone)
512-343-0535 (Fax)

HOME PAGE: https://law.utexas.edu/faculty/dspence/

University of Texas at Austin - Kay Bailey Hutchison Center for Energy, Law & Business ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

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