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Option Value and the Diffusion of Energy Efficient Products

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  • Erin Baker
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    Abstract

    In a widely cited series of papers, Hassett and Metcalf argue that the slow diffusion of energy saving technology may be due to a high option value to waiting. While the authors clarify that this is relevant for yes/no decisions (such as whether to add insulation to a home), this argument has been widely cited even in investment decisions that involve a choice over multiple appliances or vehicles. In this note we consider how uncertainty and irreversibility would impact a consumer’s decision about when to buy which new product. We show that, a priori, applying an option value framework is as likely to lead to slow diffusion of inefficient products as to slow diffusion of efficient products. This casts some doubt on the idea that an option value framework is the primary driver of the slow diffusion of energy efficient technologies.

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    Bibliographic Info

    Article provided by International Association for Energy Economics in its journal The Energy Journal.

    Volume (Year): Volume 33 (2012)
    Issue (Month): Number 4 ()
    Pages:

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    Handle: RePEc:aen:journl:ej33-4-03

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    Cited by:
    1. Kenneth Gillingham & Karen Palmer, 2014. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(1), pages 18-38, January.

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