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Price Cap on Gas in 2023

Writer: Sunyuen GaoSunyuen Gao

Updated: Mar 18, 2023

It is hard to believe that the government has already passed the bill to put a price cap on gas in 2023 with the belief that it would protect households and consumers. The opposition seemed to have focused on the argument that the cap could impose uncertainty on the market and damage future supply and investment, which seems to be their main reason for objection.


But few have mentioned the core issue here which is the shortage of supply, and it does not logically make sense that a price cap can solve this.


Price adjusts to supply and demand as we know. It also acts as the rule of competition that decides who gets good and who does not. Once it is suppressed, other rules of competition must arise either from the market or imposed by the government to replace the market price to solve the rationing problem.


Economists in the 50s60s acknowledged that price control would inevitably lead to economic waste when the market price exceeds the cap price as the buyers would tend to compete in other ways that are not productive. Hence, adding up the non-money cost, would not be cheaper with the cap in the end, and in total, the economic value of gas would to some degree dissipate, which means a loss to society as a whole.


In contrast, WA has successfully avoided the such problem with the gas reservation policy at a cost of foregone higher profits for producers and more tax revenues for the government while other states have allowed gas producers to exploit higher profitable opportunities offshore at the cost of higher gas prices for domestic consumers. If this is the case, would a tax that is based on the loss of consumers due to domestic supply shortage caused by producers' behaviours of exploiting higher profitable exports would constrain the behaviours of producers to take into account domestic consumers' welfare before deciding to maximize its profits?


Overall, it is surprising to see the price cap is still in use in the 21st century. Nevertheless, it provides a great opportunity to observe and learn, especially about how gas retailers would compete for gas in 2023 when wholesale gas prices will be controlled.



 
 
 

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