Hungary and Energy Price Caps: A Cure-All or A Toxic Addictive Drug?

It is a massive understatement to say that Hungary has been flirting with introducing price caps on different forms of energy. Her relationship with what purists might argue is one of the forbidden fruits of the market economy has been more of a steamy love story.

By Bálint Szőnyi

Domestic households have been enjoying centrally set price limits for electricity and natural gas since 2013, and vehicle fossil fuels were sold much below the market price for nearly a year. Advocates point to benefits, including reining in inflation; critics stress the painful long-term effects of market distortions. Practice shows that energy price caps exist for a reason but must be handled with the utmost care and are meant for a limited time.

Price caps are far from being a contemporary invention and have been employed as tools by economic policymakers throughout history. In fact, as early as in the 3rd century CE, the Roman Emperor Diocletian (ruled 284-305 CE) regulated the price of up to 800 products. His objective was to control inflation; however, tradespeople found a way around it by going off the books or switching to barter, so the measure didn’t achieve its goal.

Present-day decision-makers tend to be tempted by similar practices in desperate times. And now that two-digit inflation is ravaging the economies of more