A market-design response to the European energy crisis

Filip Tokarski, Mohammad Akbarpour, Scott Kominers and Piotr Dworczak
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Filip Tokarski: Stanford University
Mohammad Akbarpour: Stanford University

No 81, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: Due to surges in gas and electricity prices in Europe, many households will struggle to heat their homes this winter. This paper provides high-level guidance on designing a relief policy in a way that optimally trades off equity and efficiency. We argue that, contrary to conventional economic intuitions, an optimal policy may involve directly controlling prices. Because governments do not have perfect information about households' needs, price controls could improve the targeting of relief through screening out the most vulnerable by offering them discounts for reducing consumption. This could be achieved by ``threshold price caps'' that lower the price of all energy units below some consumption threshold and price units above the threshold at a higher rate.

Keywords: equity-efficiency trade-off; market design; price control; energy pricing (search for similar items in EconPapers)
JEL-codes: C78 D47 D61 D63 D82 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2023
New Economics Papers: this item is included in nep-ene and nep-reg
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