The Greek government places price controls on many types of fuel, and to the extent that the controls correlate, more or less, to existing supply and demand conditions, they are harmless in an economic sense. But today’s news tells of a smothering smog enveloping Athens as Greeks increasingly choose lumber over heating oil to warm their houses.
The reason? One has to look back at a decision by the Greek government to raise the price of diesel fuel for automobiles intended to discourage the use of private automobiles, based on the assumption that the increased fuel price would result in (i) less driving (which is good for the environment) and (ii) more use of the public transportation infrastructure (which increases the demand for government services).
One can imagine the econometric modeling that went into justifying such a scheme that represents a Greek version of Bruce Yandle’s “Bootlegger and Baptist” model. In this case, the bootleggers are those parties that benefit from an increased use of public transportation, and the Baptists are those environmentalists who believe government should discourage the use of the internal combustion engine. Working together, they can create a successful political coalition for intervening in markets that each group could not achieve individually.
Unfortunately for them, when dealing with the human person, real-world results do not always correlate to what the models predict. In this case, the Greeks, being self-interested economic actors, discovered that home heating oil can be used to run diesel cars, and since the controlled price of heating oil was below the controlled price of diesel fuel for cars, it was a no-brainer for them to divert the use heating oil to their cars.
Which brings us to the situation today. When the Greek government responded by raising heating oil prices, demand for heating fuel shifted to lumber. As a result, the number of lumber yards in Athens has increased five-fold by some accounts, providing work for some workers in Greece’s Depression-era labor market, but also much smog, especially in a place like Athens which is situated in a basin surrounded by four mountains.
It is a case of economic substitution and unintended consequences wrapped into one, as well as of government policies unquestionably reducing the quality of life that would have otherwise existed had it never intervened in the first place. One hopes the Greek government will cave in to public pressure, cry mea culpa, and remove its interventions into all facets of Greece’s fuel markets. Yet, one fears that—true to form and emboldened with injections of EU subsidies—it will instead attack lumber producers, place price controls on lumber, and threaten jail time to anyone daring to light a fireplace in his own house or business.