[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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FLAWED DEREGULATION
The California electricity market became a major national
news story in 2001 as Californians suffered rolling blackouts,
a major utility declared bankruptcy, and the state government
spent as much as $70 million per day to purchase electricity.
Rising demand, shrinking supply, and a price ceiling on
what utilities could charge consumers produced electricity
shortages. Information on the California electric industry
may be found at the California Public Utilities Commission
Web site: www.cpuc.ca.gov. The University of California
Energy Institute provides data on daily demand and supply
curves for electricity in California from 1998 to 2003 at
www.ucei.berkeley.edu/ucei/datamine/datamine.htm.
Figure 4.11. The consequences should be obvious: supply exceeds demand. To sustain
the price, government has had to purchase and stockpile huge amounts of
agricultural goods. The cost of supporting the price at these above-market levels
has been in the billions.
As government interferes with the law of supply and demand, it enters a labyrinth
of problems. To reduce supplies, it has imposed production limitations. Such limitations
not only are administratively cumbersome but also prevent the market from
adapting quickly to changing conditions. Because quotas are based on past production,
the appropriate adjustments cannot be made easily. Worse still, wheat farmers
have to keep producing wheat to maintain their quota. But doing so prevents them
from rotating their crops to protect the soil and the environment. To avoid the
buildup of surpluses, exports are subsidized. But these subsidies have angered other
countries, which view them as evidence of unfair competition. Our subsidies of wheat
exports to Mexico have hurt our economic relations with Argentina. Even Mexico has
viewed them with alarm, as they have interfered with Mexico’s attempts to reform
its agricultural sector.
ALTERNATIVE SOLUTIONS
The examples of government attempts to interfere with the workings of supply and
demand yield an important cautionary moral: one ignores the workings of the law
of supply and demand only at one’s peril. This is not to say that the government
should simply ignore the distress caused by large price and wage changes. But government
must take care in addressing the problems; relying on price controls, including
price ceilings and floors, is unlikely to be effective.
Later chapters will discuss ways in which the government can mitigate the sometimes
painful consequences of the law of supply and demand—by making use of the
power of the market rather than trying to fight against it. For example, if the govern-
94 ∂ CHAPTER 4 USING DEMAND AND SUPPLY