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Economy

Are price controls good or bad for the UK economy?

A couple of weeks ago, industry regulator Ofgem introduced a new cap on energy prices. Specifically, those on default tariffs will have their annual bills capped at £1,136, making for an average saving of £75 for an estimated 11 million Brits.

On the face of it, such an intervention appears to be a force for good. Energy providers, and particularly the Big Six, have rightly come in for criticism after fleecing customers on these particular tariffs - customers who, effectively, are their most loyal. Creating a significant saving for such a vast number of people is therefore hard to argue with, and the overall saving of £1bn actually exceeds the profits made by Big Six firms in 2017.

However, there is a flip side to this coin. Companies will not simply accept such a black hole in their profits without seeking to recoup them elsewhere. In some cases, this may mean trimming their workforce. More likely though is an increase in the prices of fixed-rate tariffs. These are tariffs which customers have actively switched to in order to make savings, as encouraged by Ofgem. 

Indeed, 17 per cent of customers switched tariff or provider last year, taking advantage of a straightforward switching process, extensive competition (there are over 70 energy suppliers in the UK) and savings which usually run into the hundreds of pounds. Should the prices of these fixed-price tariffs rise, and/or competition diminish as a result of reduced switching, then the legacy of the energy price cap (in place until 2023) may not be so positive.

So, are price floors and ceilings a good idea?

The impact of this cap on the energy market remains to be seen, but it begs a certain question: does market intervention ever work? It's a divisive issue which has always split economists. In the UK, floors and ceilings have been a particularly hot topic in the last few years, with wage floors, rent controls, tuition fee caps, minimum savings rates and rail fare freezes helping to shape the economic debate.

We've recently seen the implementation of a so-called Living Wage (essentially a minimum wage), which many free-market capitalists believed would adversely affect unemployment. However, the evidence thus far has been very much to the contrary, with jobless rates continuing to hit new record lows in the UK. Furthermore, many people have been lifted out of poverty as a result, with over 300,000 workers estimated to have been helped by this statute.

A less-successful example of a price floor is where we’ve seen a minimum price set for certain types of agricultural goods, designed to boost the income of farmers. The consequence of this is that it incentivises farmers to produce an excess of goods, with it falling on the State to pick up the tab for these surpluses in order to maintain the price floor.

In terms of price caps with mixed fortunes, the cap on tuition fees springs to mind, given that nearly all British universities charged the full rate of £9,250 for 2017-18. Not only is there little hope of the market becoming competitive again under the current system, but it also makes it difficult for prospective students to determine the quality of the institution based on such distorted price comparisons.

Free market success stories

There are also a number of examples of successful, unfettered markets which have delivered great value and quality to consumers. The enduring supermarket price war is one which has benefited consumers hugely, although you could point to any number of industries where competition is thriving.

Equally, there are a number of markets where consumers are ostensibly being ripped off. Obvious examples are the sky-high rents tenants are facing, derisory interest rates on savings and current accounts, excessive insurance premiums, the costs of broadband and mobile telephony products/services, and many more.

A recent study by the Social Market Foundation found a strong correlation between high levels of market concentration and poor service delivery in the UK. A high concentration of big companies also tends to be the common denominator among uncompetitive sectors. And there is no better example of this than energy, where the Big Six's collective market share amounts to just under 80 per cent each for gas and electricity.

Switching is the cure, not intervention

Many believe that with these behemoths taking up so much real estate, the market is broken, and there is no hope of fair competition ever being established. But this simply isn't true. As mentioned above, there are dozens of suppliers to choose from, and the Big Six's market share actually fell to a record low in 2017. The best way to bring down the inflated charges we face for gas and electricity is to vote with our feet and switch. 

In the case of energy, there is a general reluctance to do so, given the perceived hassle of switching, and a scepticism about smaller providers. But in truth, switching could hardly be any simpler, and regardless of the provider you choose, the gas and electricity running through your pipes will be the same.

Similar principles are applicable to many other sectors like personal banking, where customers keep their money in savings accounts which pay negligible interest, or forego switching benefits on current accounts. Insurance is another good example, where customers waste millions each year by accepting automatic renewals.

It is of course lamentable that, rather than reward loyal customers, these companies instead choose to treat them as cash cows, and prey on their inertia. But we as consumers wield a whole lot more power than we think, and by taking our business elsewhere when being charged over the odds, companies will be forced to respond with better deals.

That's not to say there is never a case for state intervention, or at least the provision of some assistance for consumers and market participants. But more often than not, a proactive approach on the part of the individual can go a long way to restoring a fair price equilibrium, and ultimately deliver the value to those who deserve it most: consumers.

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