Environmental/Resources Workshop: Benjamin Leard (Cornell University) "Consumer Heterogeneity and the Energy Paradox"

Thursday, January 16, 2014 - 3:40 pm to 5:00 pm
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Location:  368A Heady Hall

Description:  Benjamin Leard (Cornell University) "Consumer Heterogeneity and the Energy Paradox"

Abstract:  This paper presents an analysis of the energy paradox (the idea that consumers undervalue cost savings from investments in energy efficiency with a focus on how consumers vary in their preferences for energy cost savings.  By formulating a mixed logit discrete choice model of new vehicle demand that accounts for unobserved product characteristics, I estimate the distribution of household willingness-to-pay (WTP) for reducing gasoline costs by one dollar.  While I find that the average household puts equal weight on vehicle price and fuel cost, I find significant heterogeneity in WTP where a nontrivial fraction of households appear to be inattentive to fuel cost differences.  Encouraging these households to fully value fuel costs generates welfare gains that are on the same order of magnitude as the cost of increasing fuel economy standards.  By calibrating a simple model of the new vehicle market, I find, however, that existing policies for increasing fuel economy fall short of realizing these gains because the policies influence the purchase decisions of all households, including those that fully or overvalue fuel costs.  I also find tremendous variation in the ability of existing policies to preferentially encourage households that undervalue fuel costs to buy more fuel efficient vehicles, which highlights the importance of understanding and evaluating how energy efficiency programs target different consumer types.

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