Bridging the Gap: Using Social Psychology to Design Market Interventions to Overcome the Energy Efficiency Gap in Residential Energy Markets
82 Pages Posted: 23 Jul 2011 Last revised: 2 Nov 2014
Date Written: 2010
For decades, economists and energy policy analysts have noticed the existence of an "energy efficiency gap" – a significant underinvestment in energy efficiency measures whose benefits outweigh their costs – among residential consumers. Promoting energy efficiency is generally the most cost-effective manner to reduce greenhouse gas emissions and to meet future energy demand, while simultaneously promoting economic growth and reducing poverty. Economists have attempted to explain the energy efficiency gap by applying theories of market failures that retain the underlying assumption that consumers generally act as economically rational actors. These theories partly explain the energy efficiency gap, but because they fundamentally misconstrue the reality of human behavior, traditional economic theories alone fail to adequately account for the energy efficiency gap. Social psychologists have discovered a number of predictable behavioral tendencies that contradict the rational actor assumption of economists. Many of these behavioral tendencies serve as significant cognitive barriers to investments in energy efficiency. Because traditional economists’ explanations for the energy efficiency gap are incomplete, their public policy solutions to close the gap are likewise insufficient. Specifically, most traditional economists reject forms of public policy they deem paternalistic. The article describes a number of general factors that should be considered when determining whether a market intervention is justified and applies these factors to some specific policies designed to promote residential energy efficiency. The article finds that a suite of market interventions – such as financial subsidies and mandatory minimum energy efficiency standards for buildings, appliances, and electronic devices – is justified to address the energy efficiency gap.
Keywords: Energy Efficiency, Climate Change, Social Psychology, Paternalism, Law and Economics, Behavioral Economics
JEL Classification: A12, A13, D10, D80, D90, K00, K30, L68, L74, L94, L95, L97, L98, Q21, Q28, Q38, Q40
Suggested Citation: Suggested Citation