Wednesday , December 8 2021
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Price caps never are a good idea

Summary:
Sensible people would take the Californian deregulation of electricity supply as an example of what not to do. Of course, the powers that be took it the other way, as something to copy. Specifically, they insisted upon the silliness of allowing wholesale prices to vary with the market but retail prices remaining fixed. This had two effects. Firstly, when power became more expensive this did not feed through into consumer pockets and therefore prices didn’t do their thing of moderating demand. Secondly, all those suppliers in the middle between those wholesale and retail prices - all those unhedged at least - started to go bust. As happened in California.One manager of just such a supplier says in The Guardian: The frustrating thing is that a simpler approach to regulation that encourages

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Sensible people would take the Californian deregulation of electricity supply as an example of what not to do. Of course, the powers that be took it the other way, as something to copy. Specifically, they insisted upon the silliness of allowing wholesale prices to vary with the market but retail prices remaining fixed. This had two effects. Firstly, when power became more expensive this did not feed through into consumer pockets and therefore prices didn’t do their thing of moderating demand. Secondly, all those suppliers in the middle between those wholesale and retail prices - all those unhedged at least - started to go bust. As happened in California.

One manager of just such a supplier says in The Guardian:

The frustrating thing is that a simpler approach to regulation that encourages competition and innovation, while guaranteeing that the most loyal customers are not penalised, is possible. Why not bin the price cap?

Quite so. Price fixing simply never does work.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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