Saturday, January 13, 2007

Lifeline electricity rates - 2007 version

In 1975 I was part of a study team charged with examining "lifeline rates" for electricity in the USA. At the time energy prices were extremely high and the world was in the midst of an energy crisis. Last week a member of the Israeli parliament proposed that people with low incomes will be provided with electricity free of charge.

It is not surprising that a politician should propose such a policy. It is somewhat surprising that Israel Electricity Corporation, still a vertically integrated government monopoly, is behind the policy. IEC is in a process of battling the intention of the government to restructure it and to introduce competition. The company is not well regarded in the public. The employees of IEC receive the highest salaries in Israel. IEC support of the policy may make it somewhat popular among the potential beneficiaries.

Just as 30 years ago, it is my opinion that this is an economically bad policy. As any first year student of economics knows distorting relative prices will cause an inefficient allocation of resources. Poverty should be addressed directly, by creating jobs. If such a policy is not enough a second best approach consists of transfer payments.

There is nothing good about lifeline rates.

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