These last couple of weeks have had some interesting reminders of how markets work, and how the way we talk about markets can vary so drastically from how they actually work. Take for example, two stories: the application by Texas corporation Dynegy to take over some dormant coal plants in Illinois, and President Obama's announcement of new rules regarding emissions at electricity generating plants. In both cases, industry complains to government that the regulations place too onerous an obligation on business, and if not rolled back, they will increase prices for customers. The statement is false, and it misleads people which then provides cover for politicians acting in ways that do not serve the best interests of the general population.
In any legitimate marketplace, there are only two things that affect price: supply and demand. Prices don't depend on or affect costs, they depend on supply and demand and affect the profitability of a company. As long as the marketplace will allow a company to charge more than their costs, the company profits thereby giving it the opportunity to invest and remain in business. Cost do not depend on or affect prices, they depend on supply and demand of the material and labor needed for the company to do business, and they only affect whether the company will survive. If costs climb above what the market will pay for a good or service, then the company will either have to reduce costs, improve the product to increase the price the market will pay, or go out of business. When costs go up, the company will not necessarily be able to increase prices to make up for it - or "pass the costs onto the customer" - as industry threatens will happen.
The marketplace does not necessarily allow this because of the diversity of suppliers within the market. Requiring an energy company to do something that costs it more will only affect price if the absence of the company from the marketplace affects supply enough to raise prices. The company cannot pass on the costs to the customer if someone else in the market continues to charge the same price. In recent years, we have seen a significant shift in the marketplace for energy, whereby hydraulic fracturing has allowed for a boon in natural gas that has shifted the supply-demand curve for natural gas and electricity downward such that prices in the marketplace for both sit well below the price before the Great Recession. The price for electricity continues to drop, even as natural gas prices turn up slightly. This price shift has put coal and even nuclear in a precarious position where companies cannot line up the capital to invest in needed repairs and upgrades because the market for capital does not see that the investments will pay back at the prices these plants can charge for electricity. As these plants have closed, the price has not increased, it continues to decline. Prices will rise only if demand far outpaces increases in supply. We can blunt these increases by demanding fewer and fewer resources, both lowering our usage and the cost per unit for the usage that remains.
We have no problem requiring people to do things: from the basic "wear clothes in public" to "maintain your car emissions system". These regulations that affect the individual form what we might call “social norms” of society. However, if I do not want to wear clothes, I can stay in my home, and if I do not want to make repairs to my car, I can get rid of it. We establish laws protecting our land, air, and water in order to make sure that everyone has access to the opportunity to have a high quality of life. If a company cannot afford to meet reasonable standards in the marketplace, they can go out of business. If they cannot produce energy at a reasonable cost without polluting, then we need those technologies to move out of the marketplace and give up market share to those companies that can. Especially for mature industries that have been around for decades polluting our environment, ceding our ability to state as a people what we will or will not accept from a business in the market just to allow them to make a profit makes no sense.
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