Market Failures and Energy Efficiency
Renewable Energy Resources
Given the most recent failure of the international capital market, most people have gained a personal familiarity with the concept of market failure.
In brief, market failure refers to those times when, contrary to neoclassical economic thinking, the actions of individuals pursuing their own interests cause suboptimal outcomes for the group.
The video embedded at the top of the page shows James Sweeney, the Director of the Precourt Energy Efficiency Center at Stanford University, presenting his views on the market failures associated with the wide scale adoption of energy efficient measures.
He asks the question, after two decades worth of energy efficiency options being introduced into consumer markets, why has there been such a relatively small improvement in the aggregate energy efficiency of the United States?
Sweeney's answer begins with an economic perspective on the problem, and he integrates both market and behavioral analysis to highlight his analytical approach.
For example, on the market side, think of the housing market as being divided between owners and renters. Statistics show that owners are more likely to install installation and other energy savings measures because of the perceived long term cost savings. Renters, on the other hand, lack the incentive.
The end result turns out to be a rental market that rewards rental property owners for externalizing the costs of low energy efficiency, high cost energy consumption, to the renter.
From a behavioral perspective, Sweeney links consumer energy efficiency preference patterns with both a lack of salience and incomplete information.
For example, until very recently, the newest generation of televisions, the large screen HDTVs, were not required to post an energy efficiency label on them. Most consumers lacked information regarding the extra amount of energy associated with using them. On the other hand, knowledge of their high energy use tends to have little salience in consumer decision making because of the strong cultural forces associated with HDTV ownership.
Sweeney's forty minute presentation on the topic provides more examples and a clear analytical take, which makes the presentation well worth watching.
© 2010 Patricia A. Michaels.