Monday, November 30, 2009

Capturing the Massive Social Benefits of Fuel Efficiency Requires Regulation

Among the ways to motivate a transition to a Green Economy is simply to mandate greener products and practices, since all too often, people are too comfy with their habits to make changes on their own.

Will that affect how happy consumers are with their new mandated choices (in this case, more fuel-efficient, though likely smaller vehicles)?

In the long run, "no", says this Grist piece about the EPA's new regulation that would make cars and light trucks 30 percent more efficient in 5 years:

(H)ow consumers choose and value cars is...complicated. A car’s newness, size, and power are valued not just for their functionality, but for their relation to the others in the parking lot.  Consumers value horsepower not just for speed but as a status symbol and for the ability to out-accelerate others at a traffic light. People don’t necessarily want a big car, they just want a bigger car.

The problem with prestige goods is they don’t actually increase welfare or status. If Smith buys a bigger car, Jones has to buy a bigger car as well to catch up; relative to average car size, neither has really moved ahead. By devoting resources to conspicuous features like size, less visible features like fuel efficiency and financial savings are sacrificed.

The proposed CAFE regulations correct a market failure and accomplish what the non-cooperative marketplace cannot: fuel efficiency increases, Americans get the value of fuel savings, and consumers do not have to risk their positional status, since over time the entire fleet’s average size and power will shift.

This is one of the chief reasons to regulate: to increase consumer welfare by doing what the market can’t on its own. It might take consumers some time to grow accustomed to the new vehicle options, but relatively quickly they will be just as happy with their new, more fuel-efficient models, and they will be thrilled by the trillions in savings at the pump.

I honestly think this is the case for a lot of -- if not most -- green products and practices.  We've been watching the green marketplace grow considerably for several years.  I know plenty of people who are good and green in their values, but still don't necessarily use the greenest of products or practices.

In many cases, I find that the reason they are slowly, sometimes barely, transitioning to green is simply a matter of habit -- they have a way of doing things and a type of product that they have always used, and they're comfortable with it.   It's part of their routine.  In other cases, they are extremely busy and just haven't gotten around to figuring out which green brands to switch to, which composter to buy, etc.  The way around these perfectly normal human tendencies -- especially if we need to drive a positive social change quickly -- is via regulation.

People harp on regulations, but a new regulation is typically a response to a problem that the market can't solve on its own, for one reason or another.  I don't find anything wrong with smart regulatory approaches -- they are one of several tools in the toolbox and there is certainly a time and place for them.

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