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

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Wednesday, October 12, 2022 6:15 a.m.

By:

Paul Ormerod

Paul Ormerod is an economist at Volterra Partners LLP and an author.

People wonder what the real cost of things like boiling a kettle is. (Photograph by Christopher Furlong/Getty Images)

The Prime Minister’s apparent veto of a plan to persuade people to use less energy this winter has sparked controversy. The usual populace was quick to denounce Liz Truss for abdicating responsibility, following the old lines of those who wanted more or less restrictions during the pandemic.

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

But that’s not why he received his Nobel Prize in 2001, along with 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. Essentially, even though consumers are completely rational, unless they have good, reliable information when making a decision, things can go wrong.

This provides a solid base for purely informational public campaigns. An example is the requirement to label a restaurant’s calorie content and carry 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’s hard to see how that would work.

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

However, based on past experience, public policies do not always work in this rational way and regulations, once introduced, are difficult to remove. Objections to the measure could be made on these grounds.

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

Energy prices have more or less doubled, even with the massive subsidy that has been introduced courtesy of taxpayers in the future as the associated increase in public debt is paid down.

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

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

Of course, there is a risk that an information policy degenerates into sly moralism.

But free-market supporters should be much more focused on gigantic subsidies than a few posters at bus stops telling people how much energy their washer-dryers use.

Even the rational, purely interested consumer of economics textbooks can reasonably be informed by government campaigns. The cost of such a campaign is in any case quite insignificant compared to the energy price subsidy itself.

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