Energy companies charge cash-paying customers more - market failure and Government intervention

If you attended the recent tutor2u revision conferences for up-coming micro-economic exams (look out for the macro workshops and combined micro and macro to come in March) you will have seen how fuel-pricing was used as an example of market failure, government intervention strategies and government failure. Fortunately, the energy market is a gift that keeps giving to us in the economics world (every cloud has a silver lining) as a report out today (see this link for the BBC version of the story) indicates that Parliament is about to intervene to try and stop the energy companies charging more to customers who pay by cash rather than by direct debit (£114 per year, according to the report).

Is charging cash-paying customers an example of market failure that requires such Government intervention? The energy companies argue that it is not - the administration cost of handling individual cash/cheque payments is higher plus there is a higher tendency for cash payers to miss timely payments (resulting in costs for the energy firms when chasing missed payments). The extra charge can therefore be justified.

The counter argument is that the oligopolistic market remains uncompetitive and transferring accounts between suppliers continues to be complex. Customers are still not fully aware of the facts so there is far from perfect knowledge. Added to this, is the fact that a high proportion of the energy retail offers use this pricing method, suggesting that a degree of tacit collusion exists between the suppliers.

Ultimately, the big draw for the Government is the fact that cash-paying customers tend to come from poorer sections of the community (such as pensioners), many of whom do not have the accounts necessary to set up a direct-debit payment. So there is an argument that the energy-pricing policy furthers inequity in the UK.