Mark Thoma has an interesting post on relative prices and why it's important to know if oil costs are rising because of speculation or underlying scarcity. If it's speculation, he says, then you want to mute that rise, because what you're seeing is a price distortion rather than a new underlying reality. If it's scarcity, then you want that price signal to be pure, so folks drive less, the market innovates more, etc. But oil seems like exactly the wrong example here. Let's say it is speculation, and we can keep burning that sweet, sweet crude into perpetuity. What the price signal isn't telling us is that we're ruining our planet. Essentially, you want that price signal up because it's completely wrong in either case, which is why there's so much talk of carbon taxes and auctions.
