The White House has announced new standards for lighting. As I’ve said before, I prefer an economic ban to an outright ban. A less-draconian performance standard may have advantages though. I just visited Erling Moxnes in Norway, who handed me an interesting paper that describes one possible benefit of standards, even where consumers are assumed to optimize.
A frequent argument against efficiency standards is that they prohibit products that represent optimal choices for customers and thus lead to reduced customer utility. In this paper we propose and test a method to estimate such losses. Conjoint analysis is used to estimate utility functions for individuals that have recently bought a refrigerator. The utility functions are used to calculate the individuals’ utility of all the refrigerators available in the market. Revealed utility losses due to non-optimal choices by the customers seem consistent with other data on customer behavior. The same utility estimates are used to find losses due to energy efficiency standards that remove products from the market. Contrary to previous claims, we find that efficiency standards can lead to increased utility for the average customer. This is possible because customers do not make perfect choices in the first place.
The key here is not that customers are stupid and need to be coddled by the government. The method accepts customer utility functions as is (along with possible misperceptions). However, consumers perform limited search for appliances (presumably because search is costly), and thus there’s a significant random component to their choices. Standards help in that case by focusing the search space, at least with respect to one product attribute. They’re even more helpful to the extent that energy efficiency is correlated with other aspects of product quality (e.g., due to use of higher-quality components).