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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.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 66 (2013)
Issue (Month): 2 ()
Pages: 347-363

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Handle: RePEc:eee:jeeman:v:66:y:2013:i:2:p:347-363
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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