Re-evaluating the role of energy efficiency standards: A behavioral economics approach |
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Authors: | Tsvetan Tsvetanov Kathleen Segerson |
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Institution: | 1. Department of Agricultural and Resource Economics, University of Connecticut, 3107 Horsebarn Hill Rd, Unit 4021, Storrs, CT 06269-4021, United States;2. Department of Economics, University of Connecticut, 365 Fairfield Way, Unit 1063, Storrs, CT 06269-1063, United States |
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Abstract: | The economic models that prescribe Pigovian taxation as the first-best means of reducing energy-related externalities are typically based on the neoclassical model of rational consumer choice. Yet, consumer behavior in markets for energy-using durables is generally thought to be far from efficient, giving rise to the concept of the “energy-efficiency gap.” This paper presents a welfare analysis of energy policies that is based on a behavioral model of temptation and self-control, introduced by Gul and Pesendorfer 23 and 24. We find that, in the presence of temptation, (i) Pigovian taxes alone do not yield a first-best outcome, (ii) when viewed as substitutes, energy efficiency standards can dominate Pigovian taxes, and (iii) a policy combining standards with a Pigovian tax can yield higher social welfare than a Pigovian tax alone, implying that the two instruments should be viewed as complements rather than substitutes. |
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Keywords: | Behavioral economics Temptation Self-control Time-consistent preferences Energy-efficiency gap Energy efficiency standards Pigovian taxes |
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