Tuesday, May 27, 2008

Prices matter

One of the first things that economics professors teach their students is that people's behavior responds to incentives. The run-up in energy prices is giving us a textbook example of exactly that. Last Friday, the U.S. Federal Highway Administration (FHWA) reported that people drove 11 billion fewer miles in March 2008 than in March 2007, a 4.3 percent drop in driving. The decline was the largest ever measured by the FHWA and continues a trend that began in November.

The federal government has been criticized for its inaction in the energy arena. Much of this criticism is warranted. However, one important and valuable type of inaction has been the government's resistance to cap fuel prices. Americans are responding by cutting their driving miles.