Heterogeneous (Mis-) Perceptions of Energy Costs: Implications for Measurement and Policy Design

Sebastien Houde () and Erica Myers
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Sebastien Houde: ETH Zurich, Switzerland

No 19/314, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Quantifying heterogeneity in consumers’ misperceptions of product costs is crucial for policy design. We illustrate this point in the energy context and the design of Pigouvian policies. We estimate non-parametric distributions of perceptions of energy costs in the U.S. appliance market using a revealed preference approach. We show that the average degree of misperception is misleading— while the largest share of consumers correctly perceives energy costs, a significant share undervalues them, and smaller shares either significantly overvalues or completely ignores them. We show that setting a tax based on mean misperception deviates substantially from the optimal tax that accounts for heterogeneous misperceptions. While correctly characterizing misperception is crucial for setting optimal Pigouvian taxes for externalities, it is less important for setting optimal standards. We find that standards can largely outperform taxes. Standards’ advantage is they reduce variance in energy operating costs relative to taxes, which internalizes distortionary effects from misperceptions.

Keywords: demand estimation; misperceptions; energy efficiency gap; behavioral welfare economics (search for similar items in EconPapers)
JEL-codes: D12 D83 L15 Q41 Q50 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ene and nep-reg
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Citations: View citations in EconPapers (13)

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Working Paper: Heterogeneous (Mis-) Perceptions of Energy Costs: Implications for Measurement and Policy Design (2019)
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