The other day, I made a Twitter pronouncement that market forces should be embraced where 1) consumers have good access to information; 2) there is legitimate choice; and 3) the costs of production are not externalized on to people who are not parties to the transaction. (I like my blanket decrees to be in lists of three – e.g., profit should reward 1) labor; 2) creativity; or 3) risk; and government should be 1) of the people; 2) by the people; and 3) for the people.)
The process of fracking to extract oil strikes me as a market activity that doesn’t meet items #1 or #3 (of the first list). We don’t know what chemicals are in the solvent the frackers are pumping into the rock; and the frackers aren’t acknowledging, let alone paying for, the damage that is caused to those who come into contact with the waste from the process.
[Hydraulic fracturing] is the process of initiating and subsequently propagating a fracture in a rock layer, by means of a pressurized fluid, in order to release petroleum, natural gas, coal seam gas, or other substances for extraction. The fracturing, known colloquially as a frack job (or frac job), is done from a wellbore drilled into reservoir rock formations. The energy from the injection of a highly pressurized fluid, such as water, creates new channels in the rock which can increase the extraction rates and ultimate recovery of fossil fuels.
The EPA is signalling that it is getting into the business of regulating fracking. The usual suspects – industry and anti-government lawmakers – are criticizing the EPA for getting involved. But the market alone can’t keep fracking companies honest. We don’t know what, exactly, they are pumping into our streams and groundwater. We can’t honestly expect them to freely admit that they are contaminating the water that others drink or rely on for other purposes. And, the price of their product does not reflect the damage caused by such contamination.
Where the price doesn’t reflect externalized costs, the market is not efficient in allocating resources. Externalized costs are an involuntary subsidy that distorts the signals sent to the market place.
Regulation certainly has it’s problems, but I don’t think – by and large – libertarians, market enthusiasts, or anti-government ideologues are advancing effective responses to this sort of situation that do not involve a good deal of government regulation.