Natural gas supplies to Europe from Russian state corporation Gazprom have already been cut and further cuts are expected as winter approaches. This is a way for the Russian government to pressure European governments to reduce their political and military support for Ukraine. European Union governments are advancing a rationing plan to cope with reduced supplies (“Brussels tells EU states to cut gas use by 15% from next month,” financial barJuly 20, 2022):
Brussels has asked EU countries to cut their gas consumption by 15 percent and draw up contingency plans before winter when it expects severe disruptions to gas supplies from Russia.
If supply decreases by 15%, gas consumption (by consumers and intermediate users) must decrease by 15%. The question is who will bear the burden of this reduction, i.e. how will demand be rationed. Some economists prefer not to use the term “ration” when the process is done through market prices; But it insists that everything in our finite world must be rationed in one way or another. But we can use the word “allocation” as a synonym.
There are basically two ways to ration something: through market price or through the dictates of some political authority – politicians or government bureaucrats in our society. (I ignore traditional or religious norms, such as in primitive societies.) Political allocation can only be arbitrary, whether it is egalitarian or not, and even if it is hidden behind the formal rule of law. It is arbitrary for two reasons: first, authorities are likely to favor themselves or their most useful political clients; Second, even if authorities are composed of perfect benefactors, they do not have the time and space information that permeates the minds of all participants in the economy (see FA Hayek, “The Use of Knowledge in Society,” American Economic Review[1945)
Automatic allocation by price is desirable because each user is motivated to take into account the price of gas for other users (in our example). The people who will eventually receive the gas or what is made of it (say, home heating with gas-generated electricity or metal objects) are the ones most willing to pay for it. If you’re among them, you pay more for gas than the price you’re depriving others of.
It is true that some users may be willing to pay more because of higher income, wealth, or financing capacity. But that’s not necessarily the case: when you buy a car and the steel and aluminum that go into it, you outbid billionaires who would otherwise order large private yachts; If no cars are produced, their yachts will cost less. Mutatis mutandis when you buy a Cohiba. In a sense, gas rationing will remain effective if political authorities provide tradable ration coupons or equivalent cash subsidies to some users who otherwise cannot “afford” the commodity. A consumer will buy (say) a thousand cubic feet of gas at $12 only if the price is higher than what he could otherwise get for $12. (Of course there will be a shift from ordinary taxpayers to gas consumers and some resulting deadweight loss, and this fact should not be ignored.)
The EU plan appears to recognize some price allocation efficiency for industrial users of gas. If I understand the plan correctly, after reducing some EU allocations among member states, industrial buyers can get their gas through national auctions or, to the same extent in opportunity-cost terms, by bidding for whatever subsidies they can get. from the government (probably at a lower price than they pay to sell the gas)
Market-based systems can reduce risk to society and the economy. For example, Member States may introduce auction or tender systems to encourage energy reduction by industry.
And, from another EU document:
One proposed measure consists of a national or collective auction or tender system by which Member States encourage cost reductions by large customers (mostly industry). Industries best positioned to reduce demand will voluntarily offer to do so. Depending on the design, they may receive financial compensation in return.
If some measure of market price rationing is envisaged for industrial users, the allocation to household customers and other “protected customers” will remain purely political. Since the government will decide whether these “protected consumers” (households, hospitals, non-bulk consumers, and other politically favored clients) will benefit from secure supply and limited prices, political factors will determine resource allocation. Along these lines, commands for temperature or hourly thresholds would still be possible. So-called “public” spaces (places and businesses open to the public) may be subject to forced cost-cutting.
As usual, the EU plan is underpinned by a lot of derision and the arrogance of economic planners. The more you read it, the more you will understand it.
Although less efficient than if no market mechanism were used, the system would still be inefficient. Consider an individual consumer who prefers to use slightly less gas to heat his home (he has warm duvets for the night) in order to save some money for patronizing well-heated restaurants, bars, theaters, or concert halls. In a free market, this is easily done: he uses less gas – by buying less or selling his ration coupons – and spends the money on those other tasks he deems more important. In a public allocation system envisioned by the EU government for “protected consumers”, our individual consumers are subsidized more expensive gas consumption at home and may choose not to apply these subsidies to their preferred consumption activities instead.
In addition to being arbitrary, the “priority” of subsidies and interventions is very opaque. A rationally ignorant voter will have no idea that rationing reduces supply and raises the price of some goods, preferring to buy rather than subsidized heating.
Gas must be rationed among all users through market rates. If political manipulation with market allocations is to be done to protect poor households, it should be done by trading ration coupons or simply and cash subsidies. Unfortunately, politics doesn’t work very well under unrestricted democracies (“totalitarian democracies,” as Bertrand de Juvenel put it) where politicians must satisfy the most vocal clients and organized interests, while pretending to run the economy “from a social point of view.” “(Whatever that means) expect a chaos created jointly by Russia, the EU and the governments of individual EU countries.