Tuesday, September 25, 2007

When command and control is good.

UN Environmental Program:
Regulatory and control instruments such as building codes and appliance standards are the most effective way to increase energy efficiency, and so mitigate the industry's impact on global warming.
Environmental Economics Blog:
Dumbfounded: as if struck dumb with astonishment and surprise.

So of course normally I'd agree with that there are better ways to regulate than command and control. You could tax for example. But on this issue, this is one issue where I ignored economic consensus and didn't battle government bureaucracy on this point when I was at the White House.

Because if you believe the estimates, it does look like people don't respond to prices when it comes to efficiency.

That even without taxes, people pass up efficiency improvements in dryers, dishwashers, buildings, cars, that would net save them money, at any reasonable discount rates.

The gut reaction of any economist is that they must be measuring this wrong. People are not paying for the efficiency improvement because there are unobservable characteristics (e.g. fuel efficient cars are less fun). However, there have been so many studies that consistently find this, that after a while, you have to think, maybe the measurement is ok.

So economic theory could back command and control in this case if you believe that either hyperbolic discounting causes consumers to be short sighted and ignore future gains, or information costs are high and consumers can't compute the savings, or principal-agent issues, particularly relevant in buildings comes up. The people who buy the buildings, are not the people who pay the utility bills.

I guess the point just is that things are never as simple as Econ 101 textbooks might have you believe. That said, the world would probably still be a better place if more policy makers knew a little more econ 101.

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