Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative.
Ontario premier Dalton McGuinty is making the same mistake that countless politicians have made in the past. The argument they make goes like this: low-income households have difficulty paying for a certain good or service, so governments should intervene to reduce its price in order to help those in straitened circumstances.
Those who make this argument may mean well, but they are making a fundamental mistake. As Kevin Milligan of UBC puts it, they are prescribing a price solution for an income problem. The issue isn't that electricity prices are high, it's that many households have low incomes. And the solution is a simple one: give extra money to those who need it, possibly by means of increasing the HST rebate.
There are at least two negative side-effects of this sort of misdiagnosis. Firstly, it introduces yet another price distortion. An important role of prices is that they identify which goods are relatively scarce. Artificially reducing electricity prices gives the signal that that electricity is more abundant than it really is, and that there's less need to reduce consumption. Secondly, electricity consumption expenditures increase with income, so most of the sacrificed revenue will accrue to those with above-median incomes.
The best solution - one which would help low-income households and which would not give the wrong signals about the need to conserve electricity - would be to provide direct cash transfers to those in need. If it is more politically advantageous to spread the benefits more widely, then Dalton McGuinty could take a page from Mike Harris' playbook and have identical cheques sent to every household, regardless of income. Either of these measures would be less wasteful and more progressive than keeping electricity prices artificially low.
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