We develop a framework for thinking about the 'paradox' of very gradual diffusion of apparently cost-effective energy-conservation technologies. Our analysis provides some keys to understanding why this technology-diffusion process i.s gradual, and focuses attention on the factors that cause this to be the case, including those associated with potential market failures - information problems, principal/agent slippage, and unobserved costs - and those explanations that do not represent market failures - private information costs, high discount rates, and heterogeneity among potential adopters. Additionally, our analysis indicates how alternative policy instruments - both economic incentives and direct regulations can hasten the diffusion of energy-conserving technologies.
As renewed attention has been given by policy makers to energy conservation issues, it has frequently been asserted that an energy-efficiency gap exists between actual and optimal energy use. The critical questions is how to define the optimal level of energy efficiency. This paper seeks to disentangle some confusing strands of argument that are frequently brought to bear on this question, by identifying the major conceptual issues that determine the set of feasible answers. We identify five separate and distinct notions of optimality: the economists' economic potential, the technologists' economic potential, hypothetical potential, the narrow social optimum and the true social optimum. Each of these has associated with it a corresponding definition of the energy-efficiency gap. Our analysis demonstrates that necessary preconditions for identifying the right measure of the energy-efficiency gap include understanding and disentangling market failure and non-market failure explanations for the gradual diffusion of energy-efficient technologies.
Concern about carbon dioxide as a greenhouse gas has focused renewed attention on energy conservation because fossil fuel combustion is a major source of CO₂ emissions. Since it is generally acknowledged that energy use could be significantly reduced through broader adoption of existing technologies, policy makers need to know how effective various policy instruments might be in accelerating the diffusion of these technologies. We examine the factors that determine the rate of diffusion, focusing on (i) potential market failures: information problems, principal-agent slippage, and unobserved costs, and (ii) explanations that do not represent market failures: private information costs, high discount rates, and heterogeneity among potential adopters. Through a series of simulations we explore how alternative policy instruments—both economic incentives and more conventional, direct regulations—could hasten the diffusion of energy-conserving technologies.
Health-health analysis (HHA) posits a seemingly unassailable criterion for regulatory assessment: policies intended to protect human health ought to exhibit positive health benefits. Despite the apparent logic of this criterion, it is important to ask whether it would aid in the quest for better public policies. In the context of environmental issues, we find that HHA can be useful by reminding us that it is the net health impact of a proposed regulation that can be important. However, we also find that in most applications the health impacts of regulatory compliance costs are unlikely to be significant. Conventional benefit-cost analysis ought to remain the principal tool of economic assessment of environmental laws and regulations.