The windfall tax is counterproductive for a few reasons:
it distorts the incentive to fix the shortage, prices have to go up much more to make the market resolve supply issues.
it doesn’t address public anger, reactions are primarily to high prices, regardless of how the profits are handled
We can do better if we throw away the notion that money person A spends trying to buy disaster relief should directly fund disaster relief for person B. It’s a disaster, we should not be taxing disaster relief!
The recent energy crisis in Germany offers a good alternative. When Russian energy imports were disrupted (because of the Ukraine war) the government: 1) Allowed the market to set energy prices 2) Made direct cash transfers to energy consumers, based on their pre-crisis energy consumption 3) Let consumers keep cash even ifthey reduced their energy usage
If you could reduce your usage effectively you received a reward for helping ease the shortage. If you couldn’t you had some extra cash to help you cope with the shock. And the market’s price signals were left intact. In the end those who could most cheaply reduce energy usage did so, those who could not were able to smooth their income, and the invisible hand worked hard to get Germany more energy.
It’s trickier to set this sort of transfer up for a natural disaster (how much should you transfer, what if it’s unexpected, what if payment rails are down) but perhaps it’s a capability FEMA look into.
The windfall tax is counterproductive for a few reasons:
it distorts the incentive to fix the shortage, prices have to go up much more to make the market resolve supply issues.
it doesn’t address public anger, reactions are primarily to high prices, regardless of how the profits are handled
We can do better if we throw away the notion that money person A spends trying to buy disaster relief should directly fund disaster relief for person B. It’s a disaster, we should not be taxing disaster relief!
The recent energy crisis in Germany offers a good alternative. When Russian energy imports were disrupted (because of the Ukraine war) the government:
1) Allowed the market to set energy prices
2) Made direct cash transfers to energy consumers, based on their pre-crisis energy consumption
3) Let consumers keep cash even if they reduced their energy usage
If you could reduce your usage effectively you received a reward for helping ease the shortage. If you couldn’t you had some extra cash to help you cope with the shock. And the market’s price signals were left intact. In the end those who could most cheaply reduce energy usage did so, those who could not were able to smooth their income, and the invisible hand worked hard to get Germany more energy.
You can read more about the shortage on marginal revolution.
It’s trickier to set this sort of transfer up for a natural disaster (how much should you transfer, what if it’s unexpected, what if payment rails are down) but perhaps it’s a capability FEMA look into.