The Mercatus Center released a paper (PDF) this month co-authored by Ted Gayer (an economist at the Brooking Institution) and W. Kip Viscusi (an economics professor at Vanderbilt), titled “Overriding Consumer Preferences with Energy Regulations” which questions the economic justification for various government schemes implemented to force energy efficiency improvements in consumer household products, automobiles, lightbulbs, etc. The abstract is below:

This paper examines the economic justification for recent U.S. energy regulations proposed or enacted by the U.S. Department of Energy, the U.S. Department of Transportation, and the U.S. Environmental Protection Agency. The case studies include mileage requirements for motor vehicles and energy-efficiency standards for clothes dryers, room air conditioners, and light bulbs. The main findings are that the standards have a negligible effect on greenhouse gases and the preponderance of the estimated benefits stems from private benefits to consumers, based on the regulators’ presumption of consumer irrationality.

The paper walks through the basic economic understanding of consumer rationality, and explains why behavioral critiques of consumer rationality fail to undermine the general conclusion that consumers are overwhelmingly rational and tend to act in their own best interest, and that “in most contexts consumers are better equipped than analysts or policymakers to make market decisions that affect themselves.”

The authors state that benefit cost analysis (BCA) conducted by government agencies in support of these policies (fuel standards, consumer appliance efficiency, etc.) make unwarranted assumptions, including the assumption that the energy efficiency of the product should trump other considerations, such as the up front cost:

As our discussion in this paper indicates, government agencies do not properly assess the benefits from energy-efficiency standards. They assume consumers and, in some cases, firms are incapable of making rational decisions and that regulatory policy should be governed by the myopic objective of energy efficiency to the exclusion of other product attributes. Energy efficiency standards provide a valuable case study of how agencies can be blinded by parochial interests to assume not only that their mandate trumps all other concerns but also that economic actors outside of the agency are completely incapable of making sound decisions. The assumption that the world outside the agency is irrational is a direct consequence of the agencies’ view that energy efficiency is always the paramount product attribute and that choices made onany other basis must be fundamentally flawed.

This paper is important because there exists a general scorn from left leaning policy groups towards anyone who dares question the wisdom of energy efficiency programs, including the recently introduced CAFE standards which will require that automobiles meet previously unheard of fuel mileage standards by 2025. Libertarians and market oriented folks are dismissed as right-wing cranks by those who are more supportive of government intervention into the economy, and yet there remains a strong and sound argument against narrowly tailored regulations designed to nudge consumers towards making different choices.

Farhad Manjoo of Slate is convinced that a new L.E.D light bulb being produced will look similar to incandescent lighting and still save consumers money over the life of the bulb, according to their predictions and his calculations:

[...] On average, an incandescent bulb lasts about 1,000 hours—that’s about a year, if you keep it on for about three hours a day. Electricity in America also costs about 11 cents per kilowatt hour (that’s the average; it varies widely by region). In other words, a 50-cent, 60-watt incandescent bulb will use about $6.60 in electricity every year. Switch’s 60-watt-equivalent LED, meanwhile, uses only 13 watts of power, so it will cost only $1.43 per year. The Switch bulb also has an average lifespan of 20,000 hours—20 years. If you count the price of replacing the incandescent bulb every year, the Switch bulb will have saved you money by its fourth year. Over 20 years, you’ll have spent a total of about $142 for the incandescent bulbs (for electricity and replacement bulbs) and less than $50 for Switch’s 60-watt bulb. (I made a spreadsheet showing my calculations.)

The problem, of course, is that people don’t buy light bulbs that way—a lot can happen in 20 years, and it seems silly to think of light bulbs as a long-term investment vehicle. (Also, neither Switch nor any other light bulb company guarantees that their bulbs will last that long.) Sharenow concedes this line of thinking, and he’s got two answers. First, he argues that as LEDs are mass-produced over time, their prices will plummet—he estimates that a year from now, Switch’s 60-watt-equivalent bulb will sell for under $15, and could hit $10 the year after that. At that price, Switch’s new bulbs will be much harder to resist. The other advantage is that Switch’s bulbs are beautiful—the company has already seen interest from hotels, department stores, and other companies that are happy to pay for high-end decor. These firms will save money on energy and replacement bulbs and look good doing it. And once we see these bulbs showing up in fancy shops and hotels, we may become much more interested in getting them for our homes.

Besides, we won’t have much choice. With traditional bulbs going away, we’re going to need some other source of light, and nobody likes CFLs. LEDs are the light bulbs of the future. And I’m putting my money—well, a little bit of my money—where my mouth is. I’m buying two of the Switch bulbs for the lamps in our living room. Based on the demo I saw, we’ll never notice the difference, at least until we get our utility bills at the end of the month.

The whole thing is worth reading for an overview of the history of how we got to this point and the short coming of the CFLs. I will point out that though the author acknowledges that the CFLs have failed to live up to similar hype, he quickly overcomes any skepticism he claims to have had that this new technology will be widely adopted by consumers, will last as long as they claim it will (though CFLs have not), etc.

To his credit, he acknowledges the large number of uncertainties in his calculation for a mere $70 in estimated savings over 20 years (assuming electricity prices don’t go up or down, none of the bulbs break, that they last the 20 years they are claimed to last, etc.). Yet his conclusion is to throw his hands up in the air, saying roughly ‘the law is the law.’ It would seem that one could as easily conclude that this legislation was a bad idea and the government should back off it.

A lot of recent internet writing concerning light bulb technology has concluded that the regulation ‘worked’ because new technologies are appearing to replace the bulbs. Unfortunately, this analysis ignores opportunity cost. Yes, the U.S. can make laws which causes corporations to research new technologies, but their success does not signal that it was a good idea. What would those resources have been used for absent government regulation? Given the political lobbying that went into the legislation and the historical failure of top-down economic control, I can only imagine that the free-market would have put the lost time and energy to better use.

I checked my apartment to see how many light bulbs I have. It’s well over 20 and I live in Washington D.C. in a pretty small apartment. Replacing each bulb with one of these new, $20 bulbs would cost roughly $400, an amount I’m unwilling to spend on an unproven technology. The amount could be even much higher for other larger households. Does it really make sense to effectively outlaw a wildly popular technology in efforts to save tiny amounts of energy over the future? If it turns out that these bulbs work as advertised, consumers would likely begin to buy them on their own.

In related news, a new report claims that mercury vapor from broken CFLs can easily exceed the established limits deemed safe by the EPA. It is curious that we are being told that its necessary to spend billions on technologies to reduce mercury emissions from coal fired power plants, yet we are supporting policies that encourage the invitation of mercury into our home.

This week Philips Co. showcases its newest success at capturing rents produced by government mandates: it has produced a 17-watt LED bulb that functions as equivalent to a 75-watt incandescent bulb. The catch: they will initially cost around $50.

The announcement contains the usual boilerplate about how in just a few more years these light bulbs will be the cat’s pajamas, and everyone will be buying them. Go get in line. Lynne Kiesling comments:

This week Philips is releasing a mass-market LED light bulb with a physical and lumens-delivering profile to mimic incandescents at a fraction of the energy use. But they’ll still be priced at $40-45, which is a bit steep for customers who are accustomed to cheap, short-lived bulbs, so their market success will require some education and adaptation of expectations. They will also have to overcome the hurdles of the failed expectations of compact fluorescent bulbs, which have not demonstrated the required longevity/price tradeoff to make them economical (in addition to their other shortcomings). I may buy one to test, but I don’t plan on fitting out my whole house in these LEDs any time soon, based on my CFL experience.

Yep. These might be the better buy, but I won’t be surprised if consumers shun these bulbs until more data is in. LK notes that we went down this road with CFLs and they have yet to demonstrate their superiority. The article suggests it might take 17-25 years for the bulb to burn out, and thus, for the consumer to capture the savings over traditional incandescent bulbs.

Capturing the surplus value here, assuming it exists, requires that I live in the same location for the next 25 years (let’s hope not),  or take all of the bulbs with me when I leave without breaking any of them (and seriously, who steals all the light bulbs on the way out of a rental apartment — goodbye security deposit and dignity), pray that they fit into my future abode, re-sell them on E-Bay, etc.

Cheers to the people who claim that government incentives are required for innovation! Look at what you created — a bulb that might last 25 years if anyone is around to notice (remember, we all die in the long run), and costs roughly 100 times more than a traditional bulb.

I myself am holding out for night vision contact lenses, making lighting obsolete.