Description: Department Seminar

Location: 368A Heady Hall

Contact Person: Katie Harris-Lagoudakis

Title: The welfare effect of price shocks and household relief packages: Evidence from the European Energy Crisis

Abstract: How should governments support households hit by sudden increases in energy prices? We study this question in the context of the 2022-23 European Energy Crisis, during which the regulated price of residential energy in the UK rose fourfold. Using longitudinal microdata, we show that households reduced their energy consumption over the crisis, with an average elasticity of 0.3 and larger demand responses among heavy users. We develop a novel framework to quantify the policymaker's trade-off between targeting support to households most vulnerable to shocks and minimising efficiency costs. The observed policy response -- comprising a price subsidy and direct transfers -- reduced average household welfare losses from 6% to 1% of income but generated efficiency costs amounting to 11\% of public funds used. More flexibly designed transfers could close over 60% of the gap between observed policy and a system of lump-sum personalised transfers that achieve the first-best outcome.