May 11, 2017 / 12:37 PM / 4 months ago

If Britain cools on markets, others lose too

The leader of Britain's opposition Labour Party Jeremy Corbyn speaks at Paston Farm Centre, in Paston near Peterborough, Britain, January 10, 2017. REUTERS/Toby Melville

LONDON (Reuters Breakingviews) - Whoever wins Britain’s general election, free markets will be the loser. Take energy: the country’s two main parties are both promising to intervene in high household electricity prices. The ruling Conservative party, which is likely to win, has hitherto been a champion of letting the forces of supply and demand work. If this goes into reverse, other countries will have less reason to move forwards.

Electricity prices are in focus because everyone pays them, and because the free market really hasn’t worked. Britain deregulated rates in 1999, long before most others in Europe. The presence of six big suppliers makes Britain one of the most competitive markets in the bloc, yet prices are still high. Households pay a bigger premium to the wholesale electricity price than any other European country, according to the Agency for the Cooperation of Energy Regulators.

The reason is something free-market economists struggle to anticipate: irrational consumers. Two-thirds of households still pay expensive default tariffs rather than switching to cheaper options. Some may be unable to do so for valid reasons; others might just be lazy. Whatever the explanation, inactive customers who are insensitive to prices end up subsidising those who are more savvy.

These shortcomings merit some form of state intervention – but how much? Prime Minister Theresa May’s plan to cap standard tariffs goes too far. Shares in energy suppliers fell a bit when the plan was announced, but actually investors should be glad. A government-imposed cap effectively makes the state responsible for keeping inefficient big suppliers in business. A more sensible approach would be to introduce caps only for customers identified as “vulnerable”. Or the government could spend on storing gas, thereby minimising seasonal price swings and bringing prices down across the board. Such nuanced policies are harder to turn into election slogans, however.

It’s increasingly clear that populism will triumph over sound economics in the election. That will create ripples globally, because Britain is effectively abandoning the high ground it staked out in the 1980s. May has also hinted at protections for cherished British companies from foreign takeovers – a move that provides additional cover for other states to do likewise. For a country keen to be a global free-trading nation, sending a message that mostly-free markets are passé is storing up trouble.

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