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Fortnightly Magazine - January 15 1997

paradox (and most significant problem) of protectionism: It harms the long-term economic interests of the low-cost state. Hoarding a valuable resource runs counter to promoting economic development. What history has shown, from a countless number of examples across a wide spectrum of facts and circumstances, is that free exchange is almost always mutually beneficial for both seller and buyer.

The protectionist policy now advocated in some states ignores the fact that the trading of a low-cost product or service (em whether electricity, wheat, or computer technology (and whether between states, countries, or regions) (em will inevitably promote the economic well-being of the trading locality. To restrict the export of a given resource (to reserve it for local consumers, for example) is to presume that some consumers are entitled to a subsidy. A subsidy exists because consumers are paying less for the resource that what they would in an open market. No logical reason can explain why certain consumers in a well-functioning market should claim priority over others.

Consider this illustration: A state may be tempted to set up a policy to save its land from sale to buyers from out of state. This policy would strive to hold down real-estate prices for locals who might plan to buy land in the future. It would penalize current property owners. More broadly, however, it would deplete the aggregate income and wealth of the state, because the buyers who would pay the highest price for the land would be excluded from bidding. So why execute such a policy for electricity when it is considered objectionable for foodstuffs, computer software, and all the other products and services that we buy?

The logical answer is, "We shouldn't." An open, competitive, interstate market for electricity would elicit better economic performance from all participants (em even in states that today already pay low prices.

An Argument for Free Trade

More than anything else, a state that enjoys low-cost power should view this resource as a revenue stream. Low-cost power stimulates economic development (em it's an income producer. The revenues from exports would likely incorporate economic rents that could benefit the exporting state.

Trade restrictions can also backfire. A state with low costs today may become a high-cost state tomorrow, as it looks for capacity to satisfy future demand. The ability to import electricity would tend to reduce power costs in the long term.

From a regional perspective, free trade allows resources to be allocated to those placing the highest value on them. Each state can attend to those production activities for which it is best suited. In economics that's called a "comparative advantage." In the case of electricity, interstate trading would not only lower the total resource cost in the region; it would improve the allocation of power supplies, making electricity more valuable.

Finally, by stimulating competition, interstate trading should add downward pressure to electricity prices, even in a low-cost state. It would do this by increasing the availability of imported electricity and by encouraging in-state utilities to cut their costs. To paraphrase: An ebbing tide lowers all boats.