Morning Must Reads: The Economics of Fracking

Paul Krugman's column this morning offers a primer on the basic economics of fracking — and why the industry should pay the full cost of any environmental damage caused by extracting natural gas.

Economics 101 tells us that an industry imposing large costs on third parties should be required to 'internalize' those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure.

Yet what the industry and its defenders demand is, of course, precisely that it be let off the hook for the damage it causes. Why? Because we need that energy! For example, the industry-backed organization energyfromshale.org declares that 'there are only two sides in the debate: those who want our oil and natural resources developed in a safe and responsible way; and those who don’t want our oil and natural gas resources developed at all.'

So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. They say they oppose having the government 'pick winners,' yet they demand special treatment for this industry precisely because they claim it will be a winner.

The Pittsburgh Post-Gazette this morning also has some food for thought on the Marcellus industry: on the relationship between Penn State University and the natural gas drillers.

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