Who Is More Irrational - Consumers or Regulators?

Great article by Bjorn Lomborg.

"As of today, companies in the EU will be banned from making or importing vacuum cleaners above 1600 watts. And in three years, on September 1, 2017, all vacuum cleaners will have to be less than 900W.

The EU Commission tells us that the goal is to “tackle climate change” and “to help consumers save money on electricity bills.”

If consumers can save a lot of money from buying smaller vacuum cleaners why don’t they just buy those smaller vacuum cleaners? A recent study by Ted Gayer of the Brookings Institution and W. Kip Viscusi of Vanderbilt University looked into this implied irrationality of consumers.

The study goes through the cost-benefit analysis of energy regulations intended to enhance energy efficiency by the U.S. Department of Energy (DOE), the U.S. Environmental Protection Agency (EPA), and the U.S. Department of Transportation (DOT).

One would expect that the major benefits of energy regulation would be environmental benefits but it turns out that the agencies examined in the study largely find benefits in private savings to consumers.

One of the cases in the study is the CAFE regulations for cars and light trucks. Remarkably, 87% of total expected benefits of this regulation are from correcting “consumer irrationality” and only 1% are environmental benefits to the United States from reductions in greenhouse gas emissions, meaning that “the estimated costs of the regulation are 18–60 times greater than the domestic greenhouse gas benefits. If the purpose of the standards is to reduce greenhouse gas emissions, these regulations are very inefficient.”

It also begs the question if consumers are so irrational that government agencies must prohibit certain energy consuming products for us to make the right choices. The authors find no empirical evidence to support this claim and conclude:

Rather than accept the implications that consumers and firms are acting so starkly against their economic interest, a more plausible explanation is that there is something incorrect in the assumptions being made in the regulatory impact analyses. Indeed, upon closer inspection it is apparent that there is no empirical evidence provided for the types of consumer failures alleged.

Even the EPA acknowledged this logical gap, stating “it is a conundrum from an economic perspective that these large fuel savings have not been provided by automakers and purchased by consumers.”

Nonetheless, the EU is currently completing a paper that identifies up to 30 additional electrical appliances to be outlawed as high-wattage devices including electric kettles, lawn mowers, hair dryers, wifi routers and smartphones.

Gayer and Viscusi conclude their study by considering that “perhaps the main failure of rationality is that of the regulators themselves.”"