Abstract The surge in oil prices following recent geopolitical tensions has renewed the debate on policy interventions in fuel markets. This paper compares a price cap, a temporary windfall profit tax, and a fuel tax rebate in a dynamic model with demand adjustment frictions and short-run price inelasticity. Firms respond to cost shocks by increasing mark-ups, though intertemporal demand responses constrain pricing over time. A price cap directly limits price increases, while a profit tax dampens prices through intertemporal profit shifting. By contrast, a fuel tax rebate is partly offset by higher prices and entails substantial fiscal costs. Overall, price caps and profit taxes appear more effective in stabilising prices and alleviating consumer burdens.
Herz et al. (Fri,) studied this question.