Ted Gayer:
A recent wave of government regulations mandates the energy efficiency levels of a wide range of consumer and business products, including passenger cars and commercial vehicles, clothes dryers, air conditioners, and light bulbs. The ostensible purpose of these regulations is to reduce pollution, notably greenhouse-gas emissions. But our recent examination of a number of these regulations reveals that, by the agencies’ own analyses, the regulations have only a negligible effect on greenhouse gases, and the environmental benefits are vastly outweighed by the costs of compliance.
The agencies attempt to mask this finding by claiming that the regulations save consumers and firms money, by forcing them to buy more expensive energy-efficient products. By asserting, with little to no supporting evidence, that consumers and firms are making irrational decisions in their purchases of energy-intensive products, the agencies can then claim that energy-efficiency regulations provide private benefits by correcting for this irrationality, and they then use these benefits to justify the expensive regulations that yield minimal environmental gains.
This dismissal of consumer choice deviates from the long-standing methodological practice of cost-benefit analysis—and runs contrary to the guidelines set out by the Office of Management and Budget—in which it is assumed that informed citizens are better able than government bureaucrats at making private purchasing decisions that affect their own bottom line. This is not to say that people are infallible; only that the baseline assumption—supported by much empirical evidence—is that in most contexts consumers with heterogeneous preferences, financial resources and personal situations, are better equipped than analysts and policymakers to make market decisions that affect themselves.
The agencies instead assert consumer and firm irrationality with a generalized appeal to the behavioral economics literature. ...
I'm a fan of consumer sovereignty. My guess is that consumers don't buy energy efficiency products due to problems with business firms, not irrationality. For example, if is quite often difficult to believe that the product will last as long, or work as well, as advertised. When savings are a function of longevity, or quality, this uncertainty makes it perfectly rational not to purchase the energy efficient product.
It seems that behavioral economics doesn't much belong in benefit-cost analysis.
Hat tip: Newmark's Door
