11 Jun 2012

Prices versus regulations and labels

At a recent conference, I heard a story of how labels can mislead consumers into making the "wrong" choice, e.g., when choosing between a water heater that's powered by electricity with 90% efficiency and one powered by natural gas that has 60% efficiency, a consumer who chooses the former will get the most efficient, but not the most economical heater, because quite a bit of electrical energy generated at the power plant gets lost while being transmitted to your house.

The person giving this example suggested that "more consumer education" was the solution to this "paradox" of a problem, but I have an easier answer: charge the right price for energy, a price that reflects the total cost of generation and transmission (as today) as well as local and global pollution.

A consumer would then see that the heater would cost, say, $200 to run on electricity and $100 to run on natural gas. No need to "educate" that consumer, affix "clean green" labels, etc.

Bottom Line: Labels (energy star, organic, fair trade, water smart, double-carbon negative, etc.) do more for manufacturers (who can manipulate label standards) and bureaucrats (who need to "certify" everything) than consumers and the environment. Set the right price for environmental and economic costs, and let consumers choose what they want.