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

Tsvetan Tsvetanov and Kathleen Segerson ()

No 2011-24, Working papers from University of Connecticut, Department of Economics

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 energy-using 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.

Keywords: behavioral economics; temptation; self-control; time-consistent preferences; energy-efficiency gap; energy efficiency standards; Pigovian taxes (search for similar items in EconPapers)
JEL-codes: D03 Q48 Q58 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-12
New Economics Papers: this item is included in nep-ene and nep-evo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach (2011)
Working Paper: Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach (2011)
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