Energy conservation, expectations and uncertainty

Franz Wirl

Energy Economics, 2008, vol. 30, issue 4, pages 1957-1972

Abstract: This paper investigates consumers' decisions about a (single and lumpy) conservation project accounting for uncertainty and expectations (rational versus myopic). Rational expectations take into account that the profitability of individual conservation measures will affect fuel prices (here set by cartelized supply). Ignorance of this interdependence between conservation and price leads to premature investments. The interplay between demand and supply creates an incentive for a consumer cartel to initiate conservation strategically, which advances conservation compared with rational consumers but not always ahead of individually myopic decisions.

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