The Russian aggression against Ukraine has further fuelled an already high energy price inflation. There is an intensive debate on how to mitigate the impact on households, especially lower-income households. One politically
popular suggestion to mitigate the impact are price caps, which would benefit all consumers; however, this would not entice them to reduce energy consumption and – in the worst case scenario – might result in rationing. To avoid such rationing,
one could impose a more limited use of energy (such as car-free weekends in the 1970s during the first Oil Price Crisis– one of my first memories as child growing up in Hamburg). At my university, we are told to use air conditioning only between 10 and
3; however, this is not being monitored, which raises the general challenge of monitoring caps of energy usages. That’s why economists prefer the power of market pricing. But what if energy use is price-inelastic for certain ranges of consumption?
To off-set rising energy costs for consumer, transfers have been proposed. However, such transfers would have to be targeted at low-income households and involve an administrative burden (can all low-income households easily be reached, especially if
they do not pay income tax?); in addition, there might be a time gap between energy bills and transfer payments, which poses problems for liquidity-constrained consumers.