Government Mandates: Biofuel Additives

I’m a big believer in markets.  Which is another way of saying that I’m a big believer in incentives.  As the demand for lemonade goes up, the demand for sugar, waters and lemons go up.  As the demand for sugar, water and lemons go up, the price of those items goes up as well.  As the price f sugar, water and lemons go up, so do the price of the finished products that also contain those ingredients.  At this point there will be conflict.  Conflict as the rising price of two or more products compete in the market.  In time, over time, the demand of lemonade will level out as the cost hits a limiting level.

Even more fun is the impact that these higher costs of goods have down stream.  As the price of lemons goes up, farmers increase lemon  production.  They do this by engaging useful farmland into lemon trees.  By doing this, they stop the productive activity they WERE engaging in as they move to higher and higher lemon production.  Say, for example, peaches.  Lemon trees are planted in favor of peach trees and we see the ration of lemons to peaches increase.  This leads to price fluctuations between peaches and lemons.  As these forces are spread through geography and time, the price will reflect the demand of the society on both peaches and lemons.

And this will be natural.  This is what allows most people in a group, even a large group, to get what it wants.  Are there going to be winners?  Sure, there will be people who love lemons and hate peaches and will benefit by the increase production of lemons.  Losers?  You betcha!  Peach lovers but lemon haters may lament the rising prices and availability of peaches.  But on the whole, the demands and wants of the society are served.

Can you image the infrastructure required, the sheer magnitude of size required, if the government wanted to set up an office that measure and dictated the proper allocation of lemon and peach production?  For us in America it is relatively uncommon.  But in Soviet Russia, not so much.  In an effort to make sure the economy was controlled and the people fed, the State dictated means of production.  And no one was fed.

Point.  Sorry.

So, I get frustrated when I see the government mandate something.  Mandate health insurance.  Mandate light bulbs.  Mandate farm subsidies.  All of it.  All of it creates a ripple affect down the line resulting in unwanted consequences.   But I have to admit, when the state mandates a product that doesn’t exist, I am more amused than frustrated:

WASHINGTON — When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law.

But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist.

In 2012, the oil companies expect to pay even higher penalties for failing to blend in the fuel, which is made from wood chips or the inedible parts of plants like corncobs. Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year.

“It belies logic,” Charles T. Drevna, the president of the National Petrochemicals and Refiners Association, said of the 2011 quota. And raising the quota for 2012 when there is no production makes even less sense, he said.

The government is mandating a product that doesn’t exist.

Classic example of government heavy handedness.

 

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