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Things Regulators Should Stay Away From(?), Light Bulbs Edition…

July 14th, 2011 · 17 Comments
Behavioral Econ · Environmental Econ · Policy

Preface: I do not self-identify as a libertarian. In fact, I get somewhat irritated by the typical libertarian ideology-driven assumption that less regulation is always the answer. On a potentially related note, some of you have pointed out that I get my panties in a twist over seemingly random things. These two items, strangely enough, bring us to the topic of light bulbs.

I recall reading awhile back that Congress had enacted legislation in 2007 that would phase out the use of many currently popular incandescent light bulbs. Technically speaking, the legislation is not a ban per se, but instead it’s an energy efficiency requirement that many existing incandescent light bulbs do not meet. (Gotta love semantics.) At the time, I was annoyed not on ideological or economic grounds but instead because I just don’t like fluorescent light bulbs and it’s unclear whether light bulb manufacturers will introduce new conventional light bulbs that meet the efficiency requirement or just switch over entirely to halogen and compact fluorescent bulbs. In either case, the up-front cost of a light bulb is pretty much guaranteed to increase, though there is disagreement on how big the price increase will be.

As it turns out, Republicans are trying to make my plan to stockpile a lifetime supply of energy-sucking incandescent light bulbs unnecessary by repealing the 2007 legislation. There is, not surprisingly, a vocal libertarian population that also isn’t so pleased with the legislation, and, on logical grounds, their arguments mostly make sense, despite the fact that they overlook my explicit distaste for non-incandescent lighting. (In summary, the arguments are of the form “if this was better for people, they wouldn’t need to be forced to do it.”)

I would, however, like to take this opportunity to step back and try to understand the pros and cons of the legislation from an (unbiased, hopefully) economic perspective.

It’s pretty clear that the goal of the legislation is to reduce energy consumption, and this goal is marketed to the public by touting the fact that the restrictions will save people money in the end. The savings theoretically come from the fact that the increased lifespan and lower operating costs of more energy-efficient bulbs will eventually outweigh the higher up-front bulb cost. Like the libertarians, I have to wonder why people aren’t jumping at this supposedly wonderful money-saving opportunity on their own. There are a number of potential reasons:

  • People are unaware of the projected cost savings. Given that I had to look up how much energy costs in my own home, this seems like a legitimate possibility. However, if this is the case, wouldn’t it make more sense to undertake an awareness campaign instead of forcing people’s hands (or wallets)? After all, there’s certainly an awareness-campaign aspect to the legislation anyway.
  • Some people rationally discount future benefits as compared to current costs more than the people calculating the cost savings estimate. In other words, people don’t value the future cost savings as much as policymakers think they do (or should). If this is the case, the legislation makes these people objectively worse off by forcing them into economic transactions that are not beneficial to them.
  • Some people irrationally discount future benefits too much compared to current costs. The “too much” used in the sentence isn’t supposed to be a value judgment, it just reflects a possibility that individuals’ short-term desires to avoid costs might preclude them acting in their own long-term best interests. (Behavioral economists call these “time-inconsistent” preferences, since they can induce regret after the fact.)

    In this case, there is a potential argument to be made for, in essence, legislating to save people from their own weaknesses. However, in addition to sounding kind of terrifying, this approach suffers from several weaknesses of its own. First, it’s very difficult to tell whether an individual is acting rationally or irrationally- maybe someday we’ll hear about tons of people going “man, I wish I had bought those compact fluorescent bulbs way back when,” but, without this information, policymakers can’t distinguish between “right” and “wrong” choices from an individual’s perspective. Second, even if policymakers could distinguish between “good” and “bad” choices, it’s extraordinarily difficult to write a restrictive policy that saves the people who need to be saved without forcing a bad transaction on those who are acting rationally. To solve this problem, some economists advocate a sort of libertarian paternalism that “nudges” people towards their presumed long-term best interests without actually forcing choices upon them. The 2007 legislation, on the other hand, is much more of a shove than a nudge.

So far, I seem to be arguing on the libertarian side of the aisle. Is there something that I’m missing? Well, kind of. Remember the part about how the goal of the legislation was to reduce energy usage? The fact that reduced energy usage is seen as a good thing implies that people consume more energy than is socially optimal. This is because the 16.86 cents per kilowatt-hour that I pay, for example, apparently doesn’t reflect the cost to society of using the energy when pollution and other side effects are taken into account. In other words, there is a negative externality on energy consumption.

When negative externalities are present, government can actually increase welfare for society by imposing a tax equal to the size of the externality generated. This system works because it forces producers and consumers to take the amount of the market side effect (read, externality) into account in their decision-making processes. For example, if one is doing 5 cents per kilowatt-hour of damage to the environment by running the microwave or TV or whatever, then a tax of 5 cents per kilowatt-hour will get him to internalize this social cost in his choices and he will reduce his consumption to the socially optimal amount. (The difficulty in this approach is of course figuring out how big the externality is in dollar terms. I mean, how much would you need to be compensated in order to indifferently accept the pollution from the energy consumed by my computer while I wrote this article? You don’t know? Me neither.)

In the case of electricity, raising prices would be fairly straightforward since prices are often regulated by the government anyway. That said, if the government were to simply raise prices rather than explicitly collecting a tax, the electric utilities would be the ones to benefit from getting to the socially optimal level of consumption. On the other hand, the government could use the tax revenue generated to fund environmental programs or, you know, keep schools open and such.

The presence of an externality implies that there is a case to be made for regulation, but is the 2007 legislation taking the right approach? (By “right” I guess I mean “achieving a goal with the least possible inconvenience to people.”) See, the fun thing about energy is that it doesn’t know what it’s being used for. Therefore, a kilowatt-hour of energy used to power my light bulbs generates exactly the same side effects as a kilowatt-hour of energy used to power my television. Given that energy is fungible in this way, doesn’t it stand to reason that the regulation of energy usage should be fungible as well? A uniform energy regulation approach would allow people to choose for themselves where the least painful opportunities for reducing energy usage are- for some people, this might involve installing compact fluorescent bulbs and leaving the computer running while for me it might involve sticking with the incandescent bulbs and learning to actually turn off the television when I’m not in the living room. A tax would allow for this self-management and would thus be less burdensome on society than a policy directed specifically at light bulbs. (And yes, I am well aware that there are specific energy efficiency requirements in place for other appliances, but that doesn’t make it right.)

Hm. Despite having advocated for a tax here, I seem to still be on the libertarian side of the fence, especially since I appear to be very much in agreement with Virginia Postrel on the issue. In fact, she even beings up an additional good point:

Instead, the law raises the price of light bulbs, but not the price of using them. In fact, its supporters loudly proclaim that the new bulbs will cost less to use. If true, the savings could encourage people to keep the lights on longer.

It’s true- once the light bulbs are purchased, they are a sunk cost and rationally don’t factor into future decision-making processes, so it’s pretty likely that increased usage could result. It’s less likely that the increased usage would be severe enough to result in increased energy consumption, but it’s a mistake to base forecasts on an assumption that people won’t start leaving the cheap-to-use lights on more.

In case you’re curious, Republicans failed in their bid on Tuesday to keep this legislation from going into effect. Also, given that I’ve now written almost 1500 words on freaking LIGHT BULBS, I think the person I agree with most is Jon Stewart:

Ironically enough, I am test driving some soft-white compact fluorescent bulbs in my apartment as we speak. Why? Because I have visually appealing light fixtures that have the unfortunate drawback of not being able to handle high-wattage bulbs. Thus, the compact fluorescent bulbs allow me to have more light without the risk of starting an electrical fire. I guess my point is that people can be convinced to change, it just takes the right value proposition.

Tags: Behavioral Econ · Environmental Econ · Policy

17 responses so far ↓

  • 1 cmc // Jul 14, 2011 at 3:18 pm

    One of the biggest proponents of the regulation was the light bulb industry. Worried that states would take it upon themselves and all have different standards or actually declare certain types of bulbs illegal, they worked with lawmakers to make a federal standard for efficiency. Because they can achieve economies of scale, this spurred innovation to the point that there are now incandescent light bulbs that meet the said standard set in 2007 and LED light bulbs are rapidly coming down in price and rising in quality.

  • 2 econgirl // Jul 14, 2011 at 3:30 pm

    Wait- light bulb manufacturers were in favor of that thing that would shift demand to their higher-priced and higher-margin products? Well knock me over with a feather. =P

    The individual state regulations are a valid logistical issue, and states like California did in fact put its own restrictions in place before the federal government took up the cause. That said, there was nothing stopping the manufacturers from taking it upon themselves to develop new products that would meet whatever potential standards the states would enact. (There’s also nothing stopping states from still enacting stricter standards than those put in place by the federal government.)

    If the “better” light bulbs were actually something that people wanted, the economies of scale could have been realized without any sort of government mandate.

  • 3 Viktor // Jul 14, 2011 at 3:50 pm

    Well, first of all, I would recommend LED if CFL isn’t working for you. They are more expensive but some of them have really nice light characteristics.

    Second of all, I would prefer carbon taxes to light bulb bans, but then – there are efficiency standards for cars why not for lights?

    Anyhow, I am writing to you from the European Union, where most incandescent bulbs are already banned, and we are looking at halogen next.

    Yes, it is very “nanny state”, but actually I think that the energy ratings on appliances (http://en.wikipedia.org/wiki/European_Union_energy_label) have had a greater effect on behaviour — that is more in line with the awareness-campaign idea. Today it is very hard here (Sweden) to find kitchen appliances that are not rated at least B.

  • 4 Ben Lunsford // Jul 14, 2011 at 4:03 pm

    Increased usage isn’t much of an issue if you do the math. CFLs and LEDs cost almost nothing (in terms of either $ or energy) to leave on. Keeping them on for 24 hours a day uses less energy than an incandescent turned on for 6 hours a day. Seriously. Also, I’m not sure that people want to pay to keep unnecessary lights on, even if the practice becomes less expensive. Whether a large waste or a small waste, it’s still a waste.

    Also, carbon taxes are unnecessarily complex. Voters automatically hate anything complicated and anything with the word “tax” in it. Efficiency standards are much more palatable to voters and have essentially the same end result… so it’s just a smarter and more realistic route to take.

    Probably the best things our government has done lately are the CAFE standards for cars and the light bulb standards. Agree to disagree.

  • 5 Richard Havell // Jul 14, 2011 at 6:34 pm

    I agree that Pigovian-style taxes are best for dealing with externalities such as carbon emissions – their reduction will naturally involve a mixture of more energy efficient appliances and cleaner power generation and the market is well placed to balance out the two in order to achieve the necessary reductions at the lowest cost (in both monetary and utility terms).

    However, there are situations where this is impractical compared to regulation. Take car safety regulations, for example, it would be possible to impose a fine of, say, $50,000 on car manufacturers every time somebody is killed in an accident involving one of their cars and let them decide what level of safety features are necessary in their cars based upon this. However, the incentive problems for individual firms and drivers are obvious and it’s difficult to see how the manufacturers and drivers are better informed than the government given they both have access to the same research and so forth.

  • 6 Dan L // Jul 15, 2011 at 10:27 am

    1. CF light bulbs have come a long way. The early ones (and probably also the cheap ones now) were awful and made every room look like a morgue. But right now I have a room that has both CF and incandescent bulbs, and the difference is slight. How is your test drive with the new bulb going? (Neither here nor there: I wonder how much of our “indoor light spectrum preference” is purely cultural vs natural.)

    2. Actually, something that annoys me more about CF bulbs is that they are not round. It makes naked light bulbs less aesthetically pleasing, but the annoyance is trivial.

    3. A pretty good anti-regulation argument (loved by your bff N. Gregory) is that people will just become more likely to leave their lights on. I think that is true, but as pointed out by Ben, the huge difference in efficiency will surely swamp this effect.

    4. Of course any true environmentalist (or even any honest Pigovian) should want more taxes on electricity. But politically, efficiency standards are a much easier sell. And in any case, they can achieve things that taxes cannot, because of the “irrationality” of the consumer. I use the quotes, because I’m including things like not knowing how much you are paying for light as part of “irrationality.”

    5. I’ve decided that my new response to any suggestion that consumers are rational is, “Lotteries exists.” As in, “Oh, you think that people will switch light bulbs if only they knew how much money they would save? The same people who play the lottery?” Or, “How can you convince people to save money by purchasing better insulation for their homes, when there are people who actually play the lottery?”

    6. I think it’s time for regulators to turn their attention the scourge of the cable boxes, among other electricity-sucking home electronics. Oh wait, I forgot, by the magic of libertarianism, these inefficiencies cannot possibly exist.

  • 7 econgirl // Jul 15, 2011 at 1:42 pm

    I disagree that energy taxes (which would be some amount per kilowatt-hour used) are more complicated than regulations of the form “lightbulbs have to meet efficiency standard X, refrigerators have to meet energy standard Y, washing machines have to meet energy standard Z, and so on.” It’s also pretty arbitrary for regulators to say “hey, let’s force light bulbs to be….uh, let’s say 25 percent more efficient by…..uh, 2014.” In this case, it actually makes more sense than usual since products that meet the increased standards are already available to consumers, but in general there’s no reason to think that legislators are correctly identifying the low-hanging fruit in terms of energy-efficiency improvements.

    The CAFE standards for cars are an interesting comparison to use here, since they are actually much more flexible than the light bulb legislation. CAFE stands for “corporate average fuel economy,” and they don’t actually outlaw the production and sale of gas guzzlers, they just stipulate that if a company is going to sell the gas guzzlers then it’s got to sell enough Priuses or whatever to compensate. (I would also be in favor of companies being able to trade amongst themselves here, since the environment doesn’t really care who makes a car.) Companies probably then up the price on the SUVs and lower the price on the hybrids in order to keep the proper balance, but the regulation doesn’t actually take any specific options away.

    If a similar rule were made for light bulbs, my 100W incandescents would get more expensive and the compact fluorescents would get cheaper. I am partly okay with this, since I should have to pay in some fashion to be a jerk and use my energy-sucking light bulbs. The downside of this situation is that I would be paying the light bulb company to be a jerk rather than paying the government, which could theoretically use the money to combat the effects of my jerk-ish antics.

  • 8 Ben Lunsford // Jul 15, 2011 at 2:45 pm

    Energy taxes aren’t politically feasible though. It has been tried before in this country and has not passed the mustard with voters. So that’s not an option unless you are speaking of a “American voters are much smarter than in real life” hypothetical.

    Regarding the “no reason to think that legislators are correctly identifying the low-hanging fruit in terms of energy-efficiency improvements” hypothesis, I disagree. Remember that General Electric, Philips, Sylvania, etc. all helped with this legislation. The people who make light bulbs can likely identify some of the low-hanging fruit since they are already growing said fruit but need economies of scale to grow it cheaply.

    This legislation has already “bore fruit” of the low-hanging variety: there are new incandescent light bulbs on the market with the soft light you desire. When mass produced (as a direct result of this legislation) they will become nearly as affordable as the old models… the difference is that the legislation removes the requirement for either consumers to pay through the nose as “early adopters” or manufacturers to sell the new tech at a loss for years while it catches on.

    Now the prices will come down immediately because of “mandated sales” and now the transition is farrrr less messy for everyone involved.

    If this were more like the CAFE standards, I guess you’d still be free to pay $5 for what is now a $0.50 light bulb, but why would you? You’ll be able to get a more efficient incandescent for $4 instead, so it’s a moot point no matter how soft a light you should desire. The old ones wouldn’t even be on the market anymore so the result is the same.

    Long story short for all of this: when the government can help us transition to better, greener technology sooner and in a fairly painless manner, it should. It’s one of the few areas in which it can be shockingly more effective than the glacially-evolving “free market”.

    Speaking of which, I wonder how many people will still believe in the magic of libertarianism when China’s five-year plans are pwning us all? ;-)

  • 9 Randy Boring // Jul 15, 2011 at 3:06 pm

    You’re at least beginning to see the “economic calculation problem” that socialists (and any other central planners) have. They cannot know the subject values of the many individuals and thus cannot know how best to fulfill them. One size will not fit all, ever.

    “there are efficiency standards for cars why not for lights?” is a fine example of one government intervention leading to another.

    And externalities are only ‘external’ because of a lack of property rights (or enforcement thereof). Taxes don’t solve the problems, just distribute them differently (while a few get a ‘take’ in the process). Regulators running around trying to police environmental abuses are not as equipped as landowners are, who actually experience the violations. Liberty, property, and accountability are what is called for.

  • 10 Ben Lunsford // Jul 15, 2011 at 3:13 pm

    This is one of the primary reasons I left the Libertarian Party and the Free State Project, and every other libertarian association nearly a decade ago now.

    “Liberty and property” can not preserve nature. There is no profit motive in saving the many species that we are bulldozing toward extinction. It’s more lucrative to build a Wal-Mart than maintain a forest.

  • 11 Punditus Maximus // Jul 15, 2011 at 8:46 pm

    Since it has already been shown that people are profoundly irrational when it comes to energy use, foregoing efficiency upgrades to their houses that pay for themselves over weeks or months instead of years, the case for Pigouvian taxes goes out the window.

  • 12 Richard Havell // Jul 17, 2011 at 9:18 am

    Randy, there’s no means to distribute the initial property rights in a Coase Theory-based method o managing externalities. Do I have the right to clean air and you must pay me to pollute or do you have the right to pollute and I must pay you for my clean air?

    Pigouvian taxes solve this problem by having the property right initially in the hands of society as a whole and having individuals pay society for the right to produce negative externalities and the ability to produce positive ones. Naturally, all the people in society would have to elect people to manage this process, in the same manner a company’s shareholders elect its board of directors.

  • 13 PhilipNolan // Jul 17, 2011 at 6:28 pm

    Just a few observations:
    “Some people irrationally discount future benefits too much compared to current costs. ” Future benefits are a “maybe” and are largely speculative. What if I die tomorrow, or tomorrow something better comes along or they decide to make the “good” thing illegal. The cost today is a real cost actually incurred. I can not today buy a cup of Starbucks coffee with future savings. To quote Sydney Greenstreet, today’s cost “is the real coin of the realm.”
    (As an aside, about ten years ago the U.S. and Europe were absolutely apoplectic about the element mercury. Almost every state passed laws to ban its use in any and every form. Any quantity, no matter how miniscule was supposed to be bad. But the flourescent lights that we are now mandated to use contain mercury – what happened to the problem with mercury?)

    Randy Boring makes an interesting and valid comment re “efficiency”. What is efficiency? They do have efficiency standards for cars, but they are bogus. The standard is miles per gallon – not passenger miles per gallon, or tons of freight hauled per gallon. If I have a Prius and I go to the store to buy a new washing machine someone is going to have to deliver it in a big vehicle – thereby needing two round trips. If I went to the store in my SUV I could bring the thing home and save the environment a round trip by a delivery van. Taking three or four kids to school every day can not be done efficiently (nor safely) in a Smart car.

    Let’s assume that every one switches to “efficient” light bulbs and “efficient” appliances. Since they are all good people they also limit consumption to just what is needed. Electricty consumption falls – the utilites have billions tied up in fixed costs. The average fixed cost of electricity production goes up and rates have to go up. They may be consuming less fuel, but the fixed cost of the generating plant (or hydro- dam or windmill) does not fall – and they have to maintain maximum capacity to still meet the occasional peak demand for electricity. So to cover those rising average fixed costs they have to raise rates. Future savings fly out the window.

    Also, let’s say my electricity bill falls because I use energy efficient appliances. Now I, and others, can afford to buy home air conditioning. The AC unit is so efficient that the increase in my utility bill will be smaller than the benefit of having the unit. So millions of new AC units are bought and are operated. Aggregate electricity usage goes up.

  • 14 Timothy Cullen // Jul 19, 2011 at 3:56 am

    There’s nothing un-libertarian about assessing a tax to address an externality.

    Establishing property rights would be ideal, but in some cases that simply isn’t possible; that’s where government could at least in theory step in, recognizing that similar government failures plague that institution as market failures do markets.

    Do the risks of mistakes and abuse in energy policy likely outweigh the potential benefits of it? That’s the important question.

  • 15 #13 // Jul 19, 2011 at 11:03 am

    “It’s pretty clear that the goal of the legislation is to reduce energy consumption,”

    A naive voter fallacy… Public Choice anyone?

  • 16 Roland Martinez // Aug 6, 2011 at 2:35 am

    Can someone point me to the most current papers/research in economics on irrational decision making? Especially Hyperbolic Discounting?

  • 17 Lucas M. Engelhardt // Jan 2, 2013 at 12:11 am

    Just a few thoughts:

    (1) Very non-academically – the thing that bothers me about the switch away from incandescents is that I have light fixtures and lamps that non-incandescent lights don’t fit into. I’ve not yet found a CFL that is the same shape (or similar enough shape) that I can use it to replace my incandescents in those fixtures. Does the cost-savings account for the fact that we have to discard all the incompatible appliances and fixtures that have been made useless by the law? Does the projected energy savings account for the fact that a bunch of new lamps and fixtures have to be produced? Does the environmental impact account for the fact that these fixtures and lamps are (probably) going to end up in landfills or are going to require energy for recycling?

    (2) More academically – to me, the real problem with “irrationality” arguments is that rationality as commonly defined in economics is horrendously strict. So strict that no one meets the definition. To me, that makes using the term horribly misleading. (When I give a behavioral econ lecture the first thing I do is talk about how bizarre the economists’ definition of rationality is, from the perspective of common speech.) Why don’t we just drop it? Scientifically, it’s not useful, because we know that it doesn’t reflect reality. Practically, it’s not useful for the same reason. To me, the only reason I can see to keep the term is if we want to start condemning people for acting “irrationally” so we can suggest nudges, but at that point, we’re equivocating. Acting irrationally in common speech means “You’re being crazy.” Acting irrationally in economese means “Your utility function doesn’t have this specific time-invariant, framing-invariant form, and/or you’re not perfect at statistical reasoning using all available, relevant data.” On the basis of the common definition, nudges to fix irrationality sounds good. We don’t want people being crazy unnecessarily. On the basis of the economese definition, nudges to fix irrationality sounds a bit nutty – like economists are upset at everyone for not fitting our nice, simple assumptions so we’re trying to dupe them into following them.

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