An information campaign on energy usage would have made a lot of economic sense

The prime minister’s apparent veto of a plan to persuade people to use less energy this winter has stirred up controversy. The usual rabble have been quick to decry Liz Truss for abdicating responsibility, following the old lines of those who wanted more or less restrictions during the pandemic.

But economic theory can readily justify certain types of government inspired advertising campaigns. The American economist Joe Stiglitz is well known for his espousal of progressive causes. He is a long standing opponent, for example, of austerity-based macroeconomic policy.

But this is not what he received his Nobel prize for in 2001, along with his fellow Americans George Akerlof and Michael Spence.

In their pioneering work in the late 1960s and 1970s, the trio incorporated the concept of imperfect information into mainstream economic theory. In essence, even if consumers are completely rational, unless they possess good and reliable information when making a decision, things can go badly wrong.

This provides a sound basis for public campaigns which are purely informative. An example is the requirement to label the calorie content of a restaurant and take away snacks and meals.

There is a cost to this measure. In an ideal world, there would be a market in which consumers who wanted the information could pay for it, but it is hard to see how this could be operated.

So in practice the costs are either borne by the company in the form of reduced profits or by consumers if the cost is passed on to them. The benefits of the policy can then, after a suitable time, be compared to the costs to judge its overall merit.

However, going on past experience, public policy does not always work in this rational way, and regulations once introduced are hard to get rid of. Objections to the measure could be made on these grounds.

The same does not apply to an informational campaign on energy costs. A specific amount of money can be allocated for a specific amount of time, after which the campaign lapses.

Energy prices have more or less doubled, even with the massive subsidy which has been introduced courtesy of taxpayers in the future as the associated rise in government debt is repaid.

It is perfectly consistent to say that it is up to individual households how to adjust to the higher prices and at the same time argue that information should be provided which helps them do this better.  

How much does it cost to boil a kettle or to have the central heating on for an hour? It is more efficient to provide such information collectively than to have millions of people trying to work it out for themselves.

Of course, there is a risk an informational policy degenerates into finger wagging moralising.

But the free marketeers should be much more focused on the gigantic subsidies than a couple of posters at bus stops telling people how much energy their washer-dryer is using.

Even the rational, purely self-interested consumer of the economics textbooks can reasonably be provided with information by government campaigns. The cost of any such campaign is in any case wholly trivial compared to the energy price subsidy itself.

As published in City AM Wednesday 12th October 2022
Image: Pxhere
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