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.


  1. I completely agree with your point on setting the right price and letting consumers decide. But, in practice it may not be so easy (which isn’t to say we should try for the best solution in the long-run). First, as a consumer, it's (at least with the standard, currently available technology) impossible to know which of my appliances uses how much electricity, let alone, figure out how much gets lost in transmission. Maybe it's possible to solve this issue with a better, smarter grid and metering system, but who will pay for that? Also, what if I don’t have access to natural gas in my house? I’m already limited in my choices by previously set up infrastructure. Second, thinking about the political reality in other countries (I’m thinking for example of China and former Soviet Union states) it is highly unlikely that these governments will give up control over energy prices any time soon. Until they do (if they in fact ever do), don't you think energy efficient labeling can be a good second best solution (i.e. better than nothing?).

  2. @Sabine -- consumption labeling for each fuel source is a GREAT idea, but "green" labeling can distract consumer from their real choices (e.g., a NG heater for someone who only has electricity).

  3. i thought economists invented the 'use every tool in the toolbox' cliche - dont we need all the market side and demand side mechanisms we can use?

    do you really think consumer education is not important in getting people to better use water, energy, etc.? if so, you're not the kind of person i would invite to my birthday party... :)

  4. @CD -- yes, indeed, but I was pointing out the displacement of a good tool with a worse one...

    education is NOT the solution -- it shifts responsibility for a complex process to people whose job (as consumers) does NOT include such duties...


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