A little less than a week ago, the Boston Globe featured a rather naive article entitled In Praise of High Gas Prices. The author argued that ultimately higher energy costs were a good thing, since they would drive consumers to more frugal habits (a Prius rather than an Escalade, for example) and spur investment in “alternative” sources of energy. He is conflating several issues. First, there is a straightforward assertion of the law of substitute goods, which states, in effect, that an increase in the price of Coca Cola will lead to an increase in demand for Pepsi. That’s fine, as far as it goes, but he also assumes that an increase in the price of the cost of production is a good and beneficial thing, if it in fact causes the subsitution. This is a political value judgment having nothing to do with economics. He makes this assumption because the alternatives are thought to be more desirable than the original. Wind power and shale oil are mentioned (more on these later).
Today, without reference to the earlier article, the Globe notices that at least one of the substitutes is maybe not such a good thing. In the San Joaquin Valley of California, it looks like the substitution of firewood for heating oil and natural gas will cause the region to fail its air pollution remediation plan. While unintended, this outcome is by no means unexpected. The same thing happened during the Carter administration, when parts of the Northeast were enveloped by a thick haze of smog from wood-burning stoves. The article doesn’t even touch on the worst aspect of the substitution, which is the loss of life from fires.