Spotlight Report

Energy Efficiency, Economic Efficiency and The Pretense of Knowledge

posted on in Energy & Environment, Law & Regulation, Property Rights
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Key facts:

  • Energy efficiency, as defined by those who embrace it as a policy guide, is focused strictly on saving energy even if it means sacrificing overall economic efficiency.
  • Energy efficiency programs focus on the relationship between one input into the production process, energy, relative to the output generated by that process.
  • This simplistic view makes no consideration for the strong possibility that other inputs — labor, plastic, steal, copper, glass, etc. — might actually increase.
  • Economic efficiency, on the other hand, relates total costs to the value of the output that those costs generate.
  • We may observe people making decisions that we consider to be inefficient, but the proper conclusion to draw is that we, not they, are misperceiving their costs and benefits.
  • In order for an increase in energy to translate into an increase in economic efficiency, it would have to result in an overall decrease in the average cost of production or, if you are a consumer, the cost of consumption. The people implementing the energy efficiency plan would have to be better off from their own perspectives.
  • Mandates and special incentive programs would not have to be put in place to promote energy efficiency, unless we assume that the government is in a better position to judge the best interest of individuals or businesses than the individuals or businesses themselves.
  • When experts and policy advocates push energy taxes, incentives, and mandates to promote energy efficiency, they are doing what Nobel Prize-winning economist F.A. Hayek warned against: crafting public policy through a “pretense of knowledge.” They pretend to have information about other people’s preferences and alternative uses of resource that they could not possibly obtain.
  • Ultimately, energy efficiency programs are necessarily an exercise in paternalism and behavior modification.


Spotlight 415: Energy Efficiency, Economic Efficiency and The Pretense of Knowledge

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He is also an adjunct faculty member in… ...

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