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The Microeconomic Theory of the Rebound Effect and Its Welfare Implications

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  • Nathan W. Chan
  • Kenneth Gillingham

Abstract

Economists have long noted that improving energy efficiency could lead to a rebound effect, reducing or possibly even eliminating the energy savings from the efficiency improvement. This paper develops a generalized model to highlight features of the theory of the microeconomic rebound effect that are particularly relevant to empirical economists. We demonstrate when common elasticity identities used for empirical estimation are biased and how gross complement and substitute relationships govern this bias. Furthermore, we formally derive the welfare implications of the rebound effect to provide clarity for ongoing policy debates about the rebound.

Suggested Citation

  • Nathan W. Chan & Kenneth Gillingham, 2015. "The Microeconomic Theory of the Rebound Effect and Its Welfare Implications," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(1), pages 133-159.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/680256
    DOI: 10.1086/680256
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