A day rarely seems to go by without fresh calls for the government to control the price of a good or service in response to some perceived unfairness. The latest example is the outcry over the higher cost of holidays taken outside school term times. But this outcry also illustrates why, more often than not, intervention would only make the supposed problem worse.
This week some newspapers have claimed that Lancashire County Council might soon be fining parents up to £1,000 if they take their children on holiday when they should be at school. This was quickly denied by the council itself. However, the reports have again drawn attention to the large price premium that travel firms can charge for breaks taken when schools are out.
In 2017 the UK Supreme Court confirmed that parents can be fined for taking children on holiday during term time without the permission of their school. It is worth remembering that this is a consequence of a public policy choice made in the perceived best interests of the child. Of course, some parents and guardians might argue that they should be left to make this call for their own children, and some libertarians might agree with them. However, even without the threat of financial penalties, most parents would probably prefer to keep their children in school most of the time.
The upshot is that flights and hotels are generally much more expensive outside term time. This has led to accusations that travel firms are ‘exploiting’ responsible law-abiding families, and prompted calls for a cap on how much extra they can charge for trips during school holidays.
In my view, these responses are muddled at many levels. For a start, travel firms are simply responding to seasonal fluctuations in demand in the same way as the provider of any other good or service. Christmas cards cost more in December than in January. Companies are not being ‘greedy’ when they set prices that reflect market conditions.
Of course, some would still argue that this amounts to ‘profiteering’ (‘profit’ itself being an increasingly dirty word these days), because firms are benefiting from people’s desire to do what is best for their children. But let’s dig a little further into the economics here.
The potential supply of holidays is pretty constant over the year – there are only a certain number of airplane seats, hotel rooms, and so on. It is therefore impossible to magic up a large amount of additional capacity overnight to meet increased demand during school holidays. Instead, it makes sense to allow prices to take the strain – rising when potential demand is high and falling when it is low.
This means that companies may actually be making losses at off-peak times, but some income during these periods is still better than none. Suppose, though, that the government imposes a cap on the premium that travel firms could charge during peak periods. This would have two unintended, and undesirable, consequences.
First, it would reduce the financial incentive for firms to provide more holidays when demand is highest. Indeed, it would probably reduce the total number of holidays on offer, full stop. This is because, without the higher prices paid during peak period, there would not be enough total revenue to cover costs throughout the year.
Some might argue that firms could simply even out their charges over the year to make up the shortfall. But off-peak prices are presumably already set at the highest level that the market can bear. Nor is there any evidence that travel firms are making excessive profits that could be used to subsidise holidays during school breaks. The travel industry is highly competitive, and many companies are surviving only on wafer-thin margins.
The second consequence of a cap on prices during school breaks would be that some new way would have to be found to decide who can take the (probably smaller number of) holidays available at times of peak demand. At the moment, prices adjust to balance demand and supply. Without this mechanism, holidays could end up being allocated on a first-come-first-served basis. Alternatively they could be raffled, or lucky families might be chosen by committees of the great and the good (another role for the PTA?).
These non-market solutions might appeal to some, but would surely be clumsy and inefficient. It would also be necessary to prevent the reselling of holiday packages to those able and willing to pay the higher prices that prevailed before, or else the only winners from the cap might be a new breed of ‘touts’. All very messy.
The upshot is that price caps are not the answer. To the extent that there is a problem, one obvious solution might be to allow more flexibility on the timing of holidays. For example, schools in different parts of the country could be encouraged to vary their term times by a week or two to spread demand (in the same way as the staggering of the start and finish of working days can reduce rush-hour congestion).
But in the meantime, higher prices for holidays taken during school breaks are not a ‘rip-off’ that government intervention can easily fix. It makes far more sense to see them for what they are – the least-bad way to manage seasonal fluctuations in demand.