Floyd Norris (a cousin of Chuck?) presents a "chicken and egg" story in today's NY Times about the slow growth of natural gas vehicles. According to Norris, capitalism breaks down in this case and the gains to trade are not exhausted and thus government intervention is needed. Here is the story. Given low natural gas prices, drivers would buy and drive natural gas cars if they knew that gas stations would sell them natural gas just like they now sell gasoline. Gas stations would invest in natural gas pipelines and refueling pumps if they believed that there would be natural gas vehicles to sell to. The co-ordination failure arises because drivers aren't buying natural gas vehicles because they anticipate that they can't refuel them and fueling stations aren't installing costly natural gas fueling stations because they anticipate that there aren't any vehicles to sell to. The cliche is that "only government" can step in and solve this co-ordination problem.
An externality lurks here. If more drivers drove using natural gas vehicles, our trade deficit would be lower, we would be less reliant on the Middle East and our greenhouse gas emissions would be lower.
In the presence of an existing negative externality (associated with gasoline consumption), would Milton Friedman support government regulation to jump start the natural gas vehicle?
A free market guy might say the following; "The price of gasoline varies across the United States. In addition, the price of natural gas varies across the U.S and the ability to install new infrastructure in gas stations differs across the U.S. In those areas where the price of gasoline is high and the price of natural gas is low and where it is easy to install new natural gas refueling stations, these are the "low hanging fruit" and will require the least subsidy to nudge these places to the "natural gas" equilibrium. Once this first domino falls then other will imitate.
If you insist on government intervention, then government could run a field experiment in which it randomizes the subsidy to existing gasoline stations for building natural gas refueling stations (in the geographic areas I sketched in the above paragraph) and then see which stations accept the subsidy and build the infrastructure and study whether car drivers respond to the pricing incentives and increased access to refueling stations.
