After hearing so much negative commentary on econ blogs about what gets printed on the WSJ editorial page (admittedly mostly from more left-leaning economists), I hesitated a bit when I came across this piece from a senior fellow at the Brookings Institute (linked to on Greg Mankiw’s blog). I braced myself against the temptations of right-wing economic punditry, knowing that my own sympathies tend in that direction, but I was pleasantly surprised. The argument is based on economic intuition, not empirical observation, but it feels solid and compelling nonetheless. In particular, I love the emphasis on externalities as the basis for regulation. The author, Robert W. Crandall, makes a strong statement about it:

“With large numbers of vehicle producers and well-informed consumers, the market is so efficient, in fact, that it ensures that all such transactions will occur, generating the socially optimal level of fuel economy. Markets may generate too little fuel economy if there are social benefits not captured fully by private parties, but CAFE proponents have failed to demonstrate such external benefits. Indeed, external benefits are not even part of their argument.”

He really drives home that externalities are the reason for regulation.

“Any call for regulation must be based on a market ‘failure’ — that is, failure of private markets to provide the proper incentives for contributing to social value. In the case of the current call for increases in CAFE, the market failure is generally identified as global warming or national security. But CAFE is a horribly inefficient mechanism for reducing carbon emissions because it does nothing to reduce emissions from power plants, older vehicles, home furnaces or industrial facilities. Nor would it apply to any emissions outside the U.S. Even if one accepts the debatable proposition that less reliance on oil would improve our national security, we should focus our attention on all oil consumption, not just that used in new vehicles.”

He does assume that the market for cars is fairly competitive and that consumers are well-informed, so that the market is well-functioning. This seems right, but I don’t really know if it is true. Just to err on the side of caution.