By Stan Veuger

Imagine! Your roof is leaking. You call a roofer, and ask him to fix it. Instead of asking for a quote, you suggest the following: “I will pay you 5 percent of the price of all the tools you bring, and I’ll pay for whatever materials you need to fix the problem. Honestly, I really believe that’s the only fair way to deal with this.”

What do you think? Will the roofer bring more tools than he would have if he were receiving a flat rate? Will you end up paying more than if you had asked five different roofers to provide quotes?

Unless the roofer is overcome by moral qualms about the damage he can do to your future prosperity, he will probably bring every single somewhat relevant tool he’s ever bought, as well as multiple borrowed vehicles and solar panels to decorate your roof with. And those materials? Why, his buddy happens to be in the shingle business! His products aren’t great, and his prices are worse – but hey, it’s not his money! And suddenly what started out as a minor nuisance has turned into a major financial burden…

…In a remarkable new research paper, newly minted University of Chicago assistant professor Steve Cicala explores the consequences of this move to what, at least in the leaking-roof context, would seem to be a more sensible regulatory framework. His findings suggest that the move to a more market-focused approach did, indeed, lead to significant efficiency gains.

Coal plants that were forced to compete on price managed to purchase cheaper coal. Not just that: remember that power plants used to be reimbursed for their capital investments. No longer — so they started using cleaner low-sulfur coal, which made it unnecessary for them to invest heavily in capital-intensive abatement technology. What does that remind you of? Yes, the competitive roofer doesn’t use his buddy’s crummy materials, and doesn’t install decorative solar panels when asked to just stop the roof from leaking.

The incentives facing coal plants in states that deregulated the electricity sector thus changed drastically, and the benefits they could reap from cost reductions drove them to realize massive efficiency gains. Cicala estimates that even though only a quarter of all coal-fired plants have been deregulated, the reduction in fuel cost alone amounts to about $1 billion a year. By that logic, deregulating coal plants in all states could bring savings of about $40 billion a decade, a significant sum…

Continue Reading at US News & World Report…

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