Why do Inefficient Policies Persist? Evidence from Price Freezes in Energy Markets

Résumé

Price freezes on essential energy commodities are widely used to curb inflation expectations and protect low-income households from price volatility. Yet these interventions often become persistent subsidies that distort markets and hinder climate policy goals. We study this dynamic by analyzing the abrupt and unexpected 2013 announcement to end Brazil’s wholesale gasoline price freeze, implemented through Petrobras—the state-owned oil company required to maintain domestic gasoline prices below international parity. The announcement provides a natural experiment to assess both the economic and political consequences of price freezes. Using an event-study design, we document a 6% abnormal stock return for Petrobras following the announcement, revealing substantial firm-level costs from enforcing the freeze. We then quantify the welfare and distributional impacts, showing that each R$1 transferred to lower-income households via the suppressed price entailed a social cost of R$1.13. This reflects both distorted marginal cost signals and poor targeting, as higher-income households captured most of the benefit. Alternative policies—such as targeted transfers—could have achieved similar redistribution at lower cost. We argue that the high salience of gasoline prices at the pump and voters’ limited awareness of the policy’s true costs contribute to the persistence of the freeze. These findings help explain why inefficient and regressive price freezes endure despite more effective alternatives.