Why Are Prices Proportional to Embodied Energies?

Abstract

The observed proportionality between nominal prices and average embodied energies cannot be explained with conventional economic theory. A model is presented that places energy transfers as the focal point of scarcity based on the idea that (i) goods are material rearrangements, and (ii) humans can only rearrange matter with energy transfers. Modified consumer and producer problems for an autarkic agent show that the opportunity cost of goods is given by their marginal energy transfers, which depend on subjective and objective factors. Under perfect competition, nominal prices arise as social manifestations of goods’ marginal energy transfers. The relation between the latter and average embodied energies explains the proportionality under study.