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Re-evaluating the role of energy efficiency standards: A behavioral economics approach


  • Tsvetanov, Tsvetan
  • Segerson, Kathleen


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 [23,24]. 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.

Suggested Citation

  • Tsvetanov, Tsvetan & Segerson, Kathleen, 2013. "Re-evaluating the role of energy efficiency standards: A behavioral economics approach," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 347-363.
  • Handle: RePEc:eee:jeeman:v:66:y:2013:i:2:p:347-363
    DOI: 10.1016/j.jeem.2013.04.006

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    Cited by:

    1. Michael K. Price, 2014. "Using field experiments to address environmental externalities and resource scarcity: major lessons learned and new directions for future research," Oxford Review of Economic Policy, Oxford University Press, vol. 30(4), pages 621-638.
    2. 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.
    3. repec:eee:eneeco:v:64:y:2017:i:c:p:63-76 is not listed on IDEAS
    4. repec:kap:jcopol:v:40:y:2017:i:4:d:10.1007_s10603-017-9361-0 is not listed on IDEAS
    5. Michelsen, Claus & El-Shagi, Makram & Rosenschon, Sebastian, 2016. "The diffusion of "green'' buildings in the housing market: empirics on the long run effects of energy efficiency regulation," Annual Conference 2016 (Augsburg): Demographic Change 145534, Verein für Socialpolitik / German Economic Association.
    6. repec:gam:jeners:v:10:y:2017:i:6:p:768-:d:100259 is not listed on IDEAS
    7. Zhu, Junming & Chertow, Marian R., 2017. "Business Strategy Under Institutional Constraints: Evidence From China's Energy Efficiency Regulations," Ecological Economics, Elsevier, vol. 135(C), pages 10-21.
    8. Aydin, Erdal, 2016. "Energy conservation in the residential sector : The role of policy and market forces," Other publications TiSEM b9cedba8-1310-4097-90fb-b, Tilburg University, School of Economics and Management.
    9. Benjamin B. Lockwood & Dmitry Taubinsky, 2017. "Regressive Sin Taxes," NBER Working Papers 23085, National Bureau of Economic Research, Inc.
    10. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.
    11. Heutel, Garth, 2015. "Optimal policy instruments for externality-producing durable goods under present bias," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 54-70.
    12. Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
    13. Tsvetan Tsvetanov & Kathleen Segerson, 2014. "The Welfare Effects of Energy Efficiency Standards When Choice Sets Matter," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 233-271.


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