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.