Of True and False Gas Price Caps

Economists occasionally tend to engage in bizarre arguments. For instance, about whether a gas price cap is really a gas price cap. Which, again, is more than semantics. In February, Isabella Weber and Sebastian Dullien proposed setting a price for basic consumption – and that is more or less what the Gas Price Commission is now proposing.

Nevertheless, some colleagues are complaining that this is not a price control at all, of course, because the price itself will not be controlled; everything above the proposed 12 cents per kilowatt hour is to be reimbursed for the basic consumption. Sort of a cost cap. But here is the thing: the whole scheme is still closer to a “price cap”, since the price that everyone has to pay is set at 12 cents for said basic consumption. This, in turn, makes a decisive difference to price-independent rebates (flat rates): the costs become calculable for consumers – and the measure addresses the cause.

The fact that the poltergeists contradict this so strongly could almost give the impression that some of them are also concerned with maintaining the belief in the constant correctness of market prices – and the prohibition of state intervention in the price mechanism. But this impression is certainly deceptive…

Last Monday, at our high-level meeting, Martin Sandbu tried to outline how to classify the handling of erratic energy prices from an economic point of view with a gratifyingly sober analysis – in an exchange with Isabella Weber, Sebastian Dullien, Karsten Neuhoff and representatives from ministries and the Bundestag. Martin has written down what he learned from this exchange – here.

It remains to be noted that there is more than just one more ex-Prime Minister in the UK. The question we ask ourselves in thinking about major paradigm shifts is whether, after the failure of the Thatcher revival, such experiments in market fundamentalism are now, after all, possibly discredited for the foreseeable future. It may well be that this would be quite good for the world.