Paternalism and New Durable-Goods Energy Efficiency Standards : Consumers Ain't Misbehavin’

This paper extends the literature on consumer decision-making and energy efficiency through recourse to insights from behavioral economics and neuroeconomics. This approach is motivated by the U.S. Department of Energy's (DOE) new regulations mandating more stringent energy-efficiency standards for consumer durables, stated to be nested in behavioral economics. Consumers, afflicted by intertemporal internalities, are said to undervalue energy savings from durables “investments,” causing suboptimal energy-efficient-appliance purchasing and, absent government intervention, the irrational foregoing of private returns. This paper critically examines DOE's regulatory actions. We first analyze consumer heuristic-formation and decision-making regarding durables, inevitably leading to the core issue of decision-making under risk versus ambiguity -- informed by research on the neural correlates to this dichotomy. We then conduct an empirical analysis of retail residential energy prices and determine that these data are unequivocally ambiguous. DOE's assertion that paternalism will produce private returns drives our subsequent step-by-step deconstruction of DOE's empirical methodology, yielding the conclusion that it artificially purges volatility and nonstationarity from energy prices. We find no evidence that the DOE regulations will produce private returns to consumers, or that consumer behavior is irrational