Fracking: Anatomy of a Free Market Failure | Truthout

A recent New York Times article reported that rural landowners who had signed leases with gas and oil companies exchanging drilling rights on their property for royalty payments have discovered that they may have been misled.

…As a result, south of the Delaware River in Pennsylvania some private landowners are signing fracking leases with gas companies, some are refusing to do so, and where the latter outnumber the former, some towns have begun to pass their own local, anti-fracking laws putting them on a collision course with the state over who has the legal right to regulate.   North of the Delaware River in New York there is no fracking, some residents are pleased that what they consider to be an environmental and health hazard has been prevented, while others are complaining that their freedom to contract however and with whomever they please has been stolen from them.

…In light of the uncertainty explained above about what role natural gas will play in the short, medium, and long-run as a source of energy, clearly energy companies as well as landowners must operate with less than perfect knowledge about key prices.

…In both cases powerful corporations who will play a big role in tomorrow’s energy markets are negotiating via an army of smooth talking salesmen with landowners, many of whom are desperate for income and know far less about the true market value of what they are selling than energy companies do about the true market value of what they are buying.

…So while there are positive externalities associated with erecting wind turbines there are multiple negative externalities associated with fracking, and consequently when all the external effects are taken into account wind turbines yield more social benefits than the market signals, whereas fracking yields less social benefits than the market would lead us to believe. …  (Economic theory also predicts that absent any subsidy, when we leave the decision about leasing wind turbines to individual negotiations between energy companies and landowners, many deals will fail to be struck even though they have expected positive net social benefits.)

If economic theory predicts that because of asymmetries in information and market power the free market solution to fracking will lead to inequitable outcomes; if economic theory predicts that because of multiple externalities the free market solution to fracking will lead to inefficient and possibly dangerous outcomes; if economic theory predicts that numerous external parties with significant interests at stake will be disenfranchised by the free market solution to fracking, what are we to do instead?

…In conclusion, New York State, which has chosen to ban a dangerous new technology with very large potential risks to the environment and human health until such time as it is proved safe beyond reasonable doubt, is pursuing a much more equitable, efficient, and environmentally sustainable course than is Pennsylvania, which is allowing fracking to proceed under free market conditions that a careful reading of economic theory predicts will lead to unfair, inefficient, and quite likely dangerous outcomes that are irreversible.

Read the analysis: Fracking: Anatomy of a Free Market Failure | Truthout.

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