Seminars

Thursday, December 19th, 2024

Martin O'Connell (Wisconsin - Madison) will present The Welfare Effects of Price Shocks and Household Relief Packages: Evidence from the European Energy Crisis ”.

Abstract:

How should governments respond to rapid increases in the cost of living driven by shocks to the prices of staple goods? We study this question in the context of the 2022–2023 European Energy Crisis. Vulnerability to price shocks depends both on energy spending patterns – which we show vary widely and only weakly correlate with income – and substitution responses.  Households responded to price rises with an average elasticity of energy consumption of 0.31, but with the top fifth of energy users having an elasticity over 50% larger than the bottom fifth. The UK government's policy response – a combination of an energy price subsidy and a universal transfer – reduced the average welfare loss from the crisis from 6% to 1% of income. However, the intervention entailed efficiency costs of £3.7bn over six months. We show that an alternative policy that bases transfers on income and past energy use, alongside a subsidy, closes 60% of the gap in social welfare between the UK’s policy and the first-best.