Re-evaluating the role of energy efficiency standards: A behavioral economics approach

Tsvetan Tsvetanov and Kathleen Segerson ()

Journal of Environmental Economics and Management, 2013, vol. 66, issue 2, 347-363

Abstract: The economic models that prescribe Pigovian taxation as the first-best means of reducing energy-related externalities are typically based on the neoclassical model of rational consumer choice. Yet, consumer behavior in markets for energy-using durables is generally thought to be far from efficient, giving rise to the concept of the “energy-efficiency gap.” This paper presents a welfare analysis of energy policies that is based on a behavioral model of temptation and self-control, introduced by Gul and Pesendorfer [23,24]. We find that, in the presence of temptation, (i) Pigovian taxes alone do not yield a first-best outcome, (ii) when viewed as substitutes, energy efficiency standards can dominate Pigovian taxes, and (iii) a policy combining standards with a Pigovian tax can yield higher social welfare than a Pigovian tax alone, implying that the two instruments should be viewed as complements rather than substitutes.

Keywords: Behavioral economics; Temptation; Self-control; Time-consistent preferences; Energy-efficiency gap; Energy efficiency standards; Pigovian taxes (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:66:y:2013:i:2:p:347-363

DOI: 10.1016/j.jeem.2013.04.006

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