Streetwise Professor

February 20, 2019

Is Ivan Glasenberg Playing B’rer Rabbit?

Filed under: Climate Change,Economics,Energy,Regulation — cpirrong @ 7:31 pm

In the folk tale about B’rer Rabbit and the Tar Baby, the trapped trickster bunny is at the mercy of B’rer Fox. The Fox debates ways to dispose of the Rabbit–hanging, drowning, burning–and the Rabbit pleads to do any of those things–just don’t throw him into the briar patch. Falling for the reverse psychology, B’rer Fox hurls B’rer Rabbit into the supposedly dreaded briars, after which B’rer Rabbit says: “Born and bred in the briar patch. Born and bred!”

Yesterday mining behemoth Glencore announced that it would cap coal output at 150 million tons per year, claiming that the cap was an acknowledgement of the threat of global warming. Various activists claimed vindication and victory.

Might I offer a more cynical explanation? Getting thrown into the output limitation briar patch is exactly what B’rer Glasenberg wants. A firm exercises market power by limiting output to raise price: global warming gives Glencore an elite-blessed excuse to limit output, i.e., exercise market power. It will be especially beneficial for Glencore if other coal producers are stampeded into cutting output too.

Indeed, you know how this will play out. The activists will now descend on the other producers, holding up Glencore as a shining progressive example. Some, perhaps most, and maybe even all, will capitulate, further increasing prices.

And Glencore/B’rer Glasenberg will laugh all the way to the bank.

As an aside, this is an interesting illustration of the theory of the second best. In a world without any distortions, an exercise of market power is a bad thing–it reduces welfare. But in a world with other distortions, an exercise of market power can enhance efficiency.

If due to an externality, coal output in a competitive industry is too large, the exercise of market power mitigates the effect of the externality.

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  1. Always wondered about the economics of progressive movement. Thanks for the nice explanation.

    Comment by Vladimir — February 21, 2019 @ 3:01 am

  2. A government sanctioned cartel is the dream of any company. Price fixing ain’t illegal if it is mandated.

    We managed to legislate for minimum alcohol pricing in Scotland. At the low end producers all have to charge the same price (per unit of alcohol). The profits don’t even get taxed away by the government. The costs of policing the scheme are born by the government. Industry reluctantly allowed themselves to be thrown into that briar patch.

    Comment by ian parkinson — February 21, 2019 @ 3:45 am

  3. Isn’t that a positive move for everyone involved though? Glencore gets rich, there is less coal pollution and the rise in prices forces investments in clean energy.

    Comment by Emmanuel — February 22, 2019 @ 10:14 am

  4. Glencore gets rich, there is less coal pollution and the rise in prices forces investments in clean energy.

    What pollution concerns you about coal? – with scrubbers and precipitators it’s a pretty-darned clean fuel source. As for ‘clean’ energy, most of it is intermittent, which is a real problem for grid operators. That in turn over-allocates resources to balancing technologies; batteries, flywheels, or imposes other costs which would not be incurred if the green lobby would learn more and protest less.

    Comment by dcardno — February 23, 2019 @ 4:16 pm

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