The Heavy Hand of Energy Policy

Economists often describe government policy implementation as either heavy handed or light touch. Heavy handed policy is accomplished through government mandate and often has adverse economic effects and sends inaccurate information to markets by way of bad price signals. Examples of heavy handed policies would be rent control (price ceiling) and minimum wage laws (price floor). The light touch approach takes economic incentives into consideration and uses markets and price signals to accomplish the intended goals.

The Obama administration aims to accelerate higher gas-mileage rules using the heavy handed approach. This idea is an easy sell to the public because the perception is that the automotive companies will bear the cost of the mandate, without realizing that the costs are passed on to the consumer. The same goals could be accomplished much more effectively and efficiently by using a simple gas tax as proposed by Greg Mankiw and his Pigou club.