Regulation and redistribution in utilities

The consumption of utilities (for example, energy and water), along with that of other goods such as food, clothing, shelter, health and education, is often thought of as something that has particular distributional significance. This concern is reflected by the range of welfare and regulatory measures in place that are designed to guard against non-participation or under-consumption. The pricing of these goods illustrates well the conflicting arguments between economic efficiency and equity. The case for charging VAT on fuel, for example, is essentially an efficiency argument which points to the distortionary effects of a tax system that increases the prices of some goods (for example, double-glazing) and not of others (for example, domestic energy). The counter-argument is based upon notions of equity: that it is unfair to tax a necessity because the effects fall hardest on the living standards of poor households.