Eco-nomics: Zen and the Art of Buying a Fuel Efficient Car

In my previous quick post about pondering the decision to trade in my car for a Prius I was trying to make the simple point that MPG figures can be misleading in terms of how much going up in fuel efficiency can reduce overall gas consumption. I mentioned that a 5 MPG bump when you start at 15 MPG is better than a 20 MPG bump when you start at 30 MPG. But as I was writing it I could not help but start to think about the general equilibrium aspects of the question (I am an economist after all - once you have swallowed the red pill there is no going back). What I wrote about was really the partial equilibrium - the cost to me all else remaining the same.

The interesting comments I received make me even more curious to know the answers to questions like: What are the effects on the used car market and on overall energy consumption if high mileage cars start accumulating? What are the effects on the markets for inputs (commenter Stacy mentions Lithium mining)? What about the energy inputs into the manufacture of a new car (as Becky mentions), should trading in a relatively new car give me pause? I mentioned the Prius, but until the new one's better mileage ratings, I had assumed that a new 'clean' diesel would be the better option given the preponderance of highway driving I do (as Spencer and Oliver mention), is this a better option? What about the disposal of all those batteries (again, as Stacy mentions)? And, finally, how much should I expect from the promises of newer and better technologies coming soon? The Volt sounds pretty good, for example, but Spencer is a skeptic.

I have a feeling that many others have explored these issues and that there is a lot of information out there of varying quality. So I would like to enlist your help in answering these questions - can you direct me to sources of quality reliable information and research about these issues? I promise to write about what I discover.

Eco-nomics: Partial and General Equilibrium

Economics is often taught using partial equilibrium - studying one market and assuming away any spillover effects.  Think of the classic example of the market for orange juice - teachers may (and usually do) ask about the effect on the OJ market from something like a hurricane that wipes out half of Florida's orange crop.  When you say that input costs will increase, shifting the supply curve to the NW and thus price will rise and the quantity sold will decrease you are ignoring any other effects - like perhaps that, without a crop to pick, there will be a flood of labor supply to OJ factories lowering costs for producers.  This last example is an example of general equilibrium - trying to trace the effects of some change through all effected markets.  We don't emphasize it much in undergraduate classes because it is HARD.  It is like trying to figure out global weather - there are so many interconnections, coming up with a good model is very difficult.

I mention this because this is one reason it is very hard to say what effect the push for biofuels will have on the prices of other crops and on overall welfare.  If there is increasing demand and thus price of corn, what will happen to the price of other crops in the short and long term?  Well it depends on what is being planted and where, the magnitude of the cross-price elasticity of demand for other crops - even how new fuels will effect transportation costs.  As you can see, blaming biofuels for rapid commodities price escalation (or defending them) is dangerous business.   It is also true, however, that general equilibrium effects are often not thought about very much in casual discussions of environmental economics.  

For example, I wonder what the effect would be if there was mass consumption of Priuses (Pri'i?). On the one hand this would reduce gas consumption dramatically, but it would also put pressure on the production of all the junk that goes into the batteries.  How much energy does it take to get the stuff?  How much pollution does this create?  What about waste?  I don't know the answers to these questions, but many good ideas, when considered in mass amounts, often become questionable. 

This, apparently, is true of biodiesel.  Now that many people have converted to biodiesel the supply of used cooking oil is not keeping up with demand (despite my appetite for fish and chips).  So now what? - the economic rationale has changed, does biodiesel still make sense?  I don't know.  But I do get grumpy when good ideas in isolation are not thought about in a general context - in the general equilibrium.

One final example.  My wife and my mother were talking very admiringly about the freecycle movement and the idea that one could help the world by not buying new stuff.  Hmmm...  OK, so I am an economist and not helping my rep by taking this on - but I see a few problems with this.  First, there is a market for this stuff, from people who can't afford new.  If middle class people started gobbling this stuff up, that would just either increase the demand for Wal-Mart style cheap stuff from China of further impoverish people who are already impoverished by driving the price of used stuff up beyond their means.  To put it plainly, you are not decreasing the demand for the stuff, just shifting who buys old and who buys new.  Also, why s consumption of new stuff such a bad thing?  This adds income and thus growth to the world.  If you care about poverty, this should be reason for pause.  

This did not go over well with the wife and mother.

My apologies for the slow blogging - life has been a bit crazy.