The Tradeoffs between Energy Efficiency, Consumer Preferences, and Economic Growth

from the book Regulation and Economic Opportunity: Blueprints for Reform

Executive Summary

Regulation is often justified by the existence of market failures in which market systems fail to maximize overall welfare. Behavioral market failures are a specific type of market failure that happens when consumers are not fully rational about decisions in a certain area. For example, consumers may not consider the long-term benefits of energy efficient appliances. In this chapter, regulatory economist James Broughel examines how policymakers should consider market failures of all types. Broughel gives special attention to behavioral market failures and shows that many regulations pass cost-benefit analysis by relying on assumptions that consumers are not rational or informed. These regulations derive the majority of their benefits from behavioral market failures that may not be best resolved by formal regulation. The chapter’s recommendations include:

  • Many energy efficiency regulations impose costs and benefits on future generations that should also be considered by policymakers when setting energy efficiency rules.
  • Policymakers considering regulations should specifically consider the long-term effects of regulation on economic growth. 
  • Regulators should be cautious about accepting benefits based on behavioral market failures because it is difficult to verify if regulations have actually made consumers better off according to their own preferences.
CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.