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

Author

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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 energyusing 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.

Suggested Citation

  • Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Papers 07, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    • Handle: RePEc:zwi:wpaper:07
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    References listed on IDEAS

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    1. McConnell, Virginia, 2013. "The New CAFE Standards: Are They Enough on Their Own?," RFF Working Paper Series dp-13-14, Resources for the Future.
    2. Brennan, Timothy J. & Palmer, Karen L., 2013. "Energy efficiency resource standards: Economics and policy," Utilities Policy, Elsevier, vol. 25(C), pages 58-68.

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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