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Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach

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  • Tsvetan Tsvetanov

    (University of Connecticut)

  • Kathleen Segerson

    (University of Connecticut)

Abstract

The economic models that prescribe Pigovian taxation as the first-best means of reducing energy-related externalities and argue that taxes are superior to energy efficiency standards are typically based on the neoclassical model of rational consumer choice. Yet, observed consumer behavior with regards to energy use and the purchase of energy-using durable goods is generally thought to be far from efficient, giving rise to the concept of the “energy-efficiency gap.” In this paper, we present a welfare analysis of Pigovian taxes and energy efficiency standards that is based on an alternative, time-consistent behavioral model. We adapt the model of temptation and self-control of Gul and Pesendorfer (2001, 2004) to the context of the purchase of energy-using durable goods. Our results suggest that (i) temptation or self-control might be a contributing factor in explaining the energy-efficiency gap, (ii) standards might be used as a commitment device to address inefficiencies in consumer choice that stem from temptation, and (iii) in the presence of temptation, a policy that combines standards with a Pigovian tax can yield higher social welfare than a Pigovian tax alone.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2011-24.

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Length: 44 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:uct:uconnp:2011-24

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Related research

Keywords: behavioral economics; temptation; self-control; time-consistent preferences; energy-efficiency gap; energy efficiency standards; Pigovian taxes;

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References

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  1. Kan, Kamhon, 2007. "Cigarette smoking and self-control," Journal of Health Economics, Elsevier, vol. 26(1), pages 61-81, January.
  2. Lucas W. Davis, 2008. "Durable goods and residential demand for energy and water: evidence from a field trial," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 530-546.
  3. Xavier Labandeira Villot & Pedro Linares, 2009. "Energy Efficiency: Economics and Policy," Economic Reports 06-09, FEDEA.
  4. Walter McManus, 2007. "The Link Between Gasoline Prices and Vehicle Sales," Business Economics, Palgrave Macmillan, vol. 42(1), pages 53-60, January.
  5. David Laibson & Andrea Repetto & Jeremy Tobacman, 2007. "Estimating Discount Functions with Consumption Choices over the Lifecycle," NBER Working Papers 13314, National Bureau of Economic Research, Inc.
  6. Kevin X.D. Huang & Zheng Liu & John Q. Zhu, 2013. "Temptation and self-control: some evidence and applications," Working Paper Series 2013-23, Federal Reserve Bank of San Francisco.
  7. Kenneth Gillingham & Richard G. Newell & Karen Palmer, 2009. "Energy Efficiency Economics and Policy," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 597-620, 09.
  8. Parry, Ian W.H. & Evans, David A. & Oates, Wallace E., 2010. "Are Energy Efficiency Standards Justified?," Discussion Papers dp-10-59, Resources For the Future.
  9. repec:nbr:nberwo:16114 is not listed on IDEAS
  10. Jianjun Miao, 2004. "Option Exercise with Temptation," Microeconomics 0409002, EconWPA.
  11. Sorrell, Steve & Dimitropoulos, John & Sommerville, Matt, 2009. "Empirical estimates of the direct rebound effect: A review," Energy Policy, Elsevier, vol. 37(4), pages 1356-1371, April.
  12. Garth Heutel, 2011. "Optimal Policy Instruments for Externality-Producing Durable Goods Under Time Inconsistency," NBER Working Papers 17083, National Bureau of Economic Research, Inc.
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Cited by:
  1. McConnell, Virginia, 2013. "The New CAFE Standards: Are They Enough on Their Own?," Discussion Papers dp-13-14, Resources For the Future.

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