California energy crisis helps producers, hurts consumers

-- North County Times, Escondido, Calif. - May 3

Posted: Thursday, May 10, 2001

The implications of California's electricity crisis are much broader than the high prices and the economic damage they are doing to California and the West. Suppliers of energy and other vitally needed products are learning that they can take much greater advantage of their market position than they ever thought possible.

Two things traditionally have kept prices in check in potentially monopolistic markets: government ownership or regulation, and restraint by businesses themselves out of fear of government involvement. ...

The weak response from California and the even weaker response from Washington, D.C., have emboldened energy producers to continue to raise electricity prices well beyond the range allowed in a normal marketplace. This is made possible by ineffective regulation and inelastic demand.

Prices are inelastic if an enormous increase in price does not significantly reduce demand for the product. ... But when electricity prices quintuple and consumers can cut consumption by only 20 percent -- which is a considerable amount -- producers will still quadruple their income. ...

In our profit-based system, manufacturers of products everywhere are looking at the California energy market and wondering how they could take advantage of a dysfunctional market in whatever products they happen to make.

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