Environmentalism and the Pricing of Gasoline

Monday, November 10, 2014

As I look around Boca Raton, Florida, I see many folks driving fuel-efficient hybrids. The economist in me wonders why all of those drivers of high-efficiency cars hate the planet so much. Wouldn't it be better if we could force companies to produce less fuel-efficient vehicles?

Many environmentalists would say the idea is crazy. Many environmentalists are also not economists. There just might be a connection.

In the 1860s, William Stanley Jevons discovered something interesting. As the efficiency of coal usage increased, the amount of coal that was purchased did not fall. In fact, the demand for coal increased tremendously! This unexpected happenstance was so confusing to many that it was dubbed the Jevons paradox. After a bit of mathematical modeling, economists soon began to understand what had happened. As machines became more efficient, it suddenly began to make sense to utilize the resources in marginally profitable devices. For instance, when it took 100 pounds of coal to run a business for a day, it may have made sense to utilize other fuels (or forgo the business operations entirely). But when it only took 10 pounds of coal to run that same business, it might make sense to expand.

So how does this relate to gasoline and cars? As gasoline becomes cheaper, cars become a lot more desirable to own and use. At $2 per mile driven, many cash-strapped consumers would think twice about driving for leisure, or utilize bicycles for shorter trips. Alternatively, if it cost a mere 1¢ to propel a car for 1,000 miles - nearly every consumer would increase his driving habits to the extreme - and many who relied on mass transit and alternative transportation schemes would suddenly find cars a lot more appealing and cause the amount of gasoline used (and thus pollution sent into the air) to increase.

Are you an environmentalist? If so, make sure you demand that the government set maximum (not minimum) gas mileage rates and start putting a Hummer in every garage. The world needs your help!

Then again, if you're just a person interested in pricing, I highly recommend that you save yourself the energy and simply buy a copy of my book The Software Pricing Handbook.