Ethanol and Mr Vinod Khosla

Markets Work

Economists have a mantra which says “Markets work” and mumble under their breath the disclaimer “subject to a bunch of conditions, of course.” By “markets work” they mean that when a whole lot of buyers and sellers get together and buy and sell stuff, magic happens through Adam Smith’s invisible hand, and everyone ends up better off than they were before the trades took place. Each market participant has to be concerned with only his objective (maximizing utility in the case of consumers, and maximizing profits in the case of producers) and the maximization of social welfare is assured.

When you go to buy, say, fuel for your home, you check out the alternatives and buy what suits your purpose cheapest. Basically, subject to the thickness of your wallet, you demand a quantity based on the price which you take as a given and which you cannot alter. You really don’t care how the fuel was produced or mined, how it was transported, how it was stored, and a million other things that went it to the process of getting that fuel to the store. All you care about is the price, and rightly so, because the price encapsulates within itself all the information you need to make the decision.
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