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How Disagreement about Social Costs leads to Inefficient Energy Productivity Investment

  • Achim Voß

Public energy productivity investment influences the amount of future energy consumption. If a present government expects its successor to value the social costs of fuel usage di erently, this adds a trategic component to its investment considerations. We analyze this governmental time-inconsistency situation as a sequential game. In particular, we show how the expectation of a more conservative party taking over makes a “green” government choose an investment level that is inecient in that neither of the parties would prefer it to the investment level of a permanent green government. Under some circumstances, the opposition would even prefer the government to stay in power for sure: The gain of avoiding strategic investment then outweighs the loss of not being able to regulate energy consumption. We also analyze welfare gains of binding agreements.

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Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 201287.

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Handle: RePEc:muc:wpaper:201287
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