Why Are Prices Proportional to Embodied Energies?

Abstract

The observed proportionality between nominal prices and average embodied energies cannot be interpreted with conventional economic theory. A model is presented that places energy transfers as the focal point of scarcity based on the idea that (1) goods are material rearrangements, and (2) humans can only rearrange matter with energy transfers. Modified consumer and producer problems for an autarkic agent show that the opportunity cost of goods are given by their marginal energy transfers, which depend on subjective and objective factors (e.g. consumer preferences and direct energy transfers). Allowing for exchange and under perfect competition, nominal prices arise as social manifestations of goods' marginal energy transfers. The proportionality between nominal prices and average embodied energy follows given the relation between the latter and marginal energy transfers. JEL Classification: D11, D21, O13, Q40 Nomenclature , Demand of final good f during , Demand of energy good , Demand of prime mover (PM) , Av. energy transfer of any good , Mg. energy transfer of good Quantity elasticity (QE) of , QE of average embodied energy of Energy surplus Marginal utility of energy surplus , -period discount factor at , Direct energy transfers on , Av. power scarcity cost of mg. Γ , Embodied energy of PM producing , , Quantity of producing ̃, Endowment of 's direct energy transfer 's power rate , 's power scarcity cost/energy surplus 's depreciation rate − , , ′ Mg. req. of production function Energy good 's energy content Θ Over-assignment of energy surplus Λ , Energy assigned per unit of c Commodity price Real price of any good Nominal price of any good k Mg. energy transfer of real money Syn. energy transf. of nom. money Quantity of real money Quantity of nominal money