The price cap has, of course, increased energy prices

That the British Government decided to copy the grand mistake of the California deregulation debacle does not come as all that much of a surprise. Government does seem to decide that it’s the mistakes, rather than successes, of others that should be copied. Or perhaps it’s that political inability to understand markets which is the universal.

The mistake being to fix retail prices. With wholesale left free this will, in any time of dearth, lead to the mass bankruptcy of the intermediaries, the retail companies. This has happened here as it did to the once mighty PG&E.

There is more though. That very fixing of the retail price, that price cap, has led to prices now being higher than they would have been without the cap. For prices do in fact lead to changes in demand. People see prices rising and they curb their demand for that item rising in price.

As ever in economics this is something that happens at the margin. How much it happens is the elasticity - the price elasticity of demand. But unless we’re talking about Giffen Goods - and no, domestic energy is not one - then rising prices curbs demand.

So, what has the price cap done? Along with bankrupting the intermediaries in the system it has protected retail consumers from the rise in prices. So too it has protected them from the signal that energy is becoming more expensive and so should be economised upon. Energy demand is - up until midnight last night perhaps - higher than it would have been without the price cap. Higher demand means higher prices.

The very existence of the price cap has made prices now higher than they would have been without the price cap.

Yes, we’re aware of the date, no, it isn’t. It’s not even some clever attempt at a reverse ferret on the foolishness traditional. Price caps, by protecting demand from price rises, increase demand and so the price level once the cap is lifted. Energy prices today would be lower than they are if the price cap had never existed.

There’s a lesson here too, one worth remembering next time someone has some bright idea about bucking markets. That is, don’t mess with markets because if you do they’ll most assuredly mess with you. You can compensate for market prices and that can often be a very good idea. You can construct markets and that’s often necessary. But attempts to fix prices in markets always do fall apart. Simply because the price is an outcome of the market itself and to change it you need to change the market interactions, not just declare that different result.

It really is true that prices for domestic energy today are higher as a result of the past price cap than they would have been without that past price cap. So, you know, thanks guys, that was really helpful of you.