Environmental Protection Agency

Energy Regulators Think You're Crazy

A new study uncovers what regulators really think of American consumers.

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Federal regulators evidently believe that Americans are irrationally choosing to spend hundreds of billions more on energy than they should. Consequently, benevolent bureaucrats have imposed regulations to guide hapless consumers toward making the proper energy saving choices when it comes to purchasing cars, air conditioners, clothes dryers, refrigerators, and light bulbs. A new study finds that the regulators are, in fact, the ones being irrational.

Regulations have traditionally been justified on the grounds that they are fixing a market failure. The case of pollution in which producers impose costs on downwind or downstream people is the classic case. As economics Nobelist Ronald Coase explained [PDF] years ago, allocating strong property rights enables markets to internalize the costs and produce economically efficient results. Ideally then, if homeowners near a factory have a property right to clean air, the factory owners can offer to compensate them for dirty air or the citizens can force the factory to clean up its emissions.

However, it could cost too much for thousands of affected people breathing bad air to assert individually their rights. In other words, the transactions costs are too for high residents to bother trying to enforce their property rights and so the polluters can keep on pumping out smoke without paying for the damage it causes. This would be a genuine case of market failure and provide a rationale for government to step in with pollution taxes or command-and-control regulations to cut air pollution in such a way as to increase the net benefits to society. 

In recent years, the Department of Energy (DOE), National Highway Traffic Safety Administration (NHTSA), and the Environmental Protection Agency (EPA) have been imposing energy efficiency regulations of various sorts on Americans. In a new working paper, "Overriding Consumer Preferences with Energy Regulations," Brookings Insitution economist Ted Gayer and Vanderbilt University economist Kip Viscusi look for the market failures that DOE and EPA regulations are supposedly addressing and do not find them. Instead, they find blinkered agencies ignoring important aspects of products that consumers value in their single-minded pursuit of energy efficiency. 

Instead of seeking to ameliorate market failures, the agencies largely justify the costs of their energy conservation regulations by asserting that Americans are irrational. Specifically, consumers are supposedly incurring huge welfare losses because they myopically undervalue future energy costs when they purchase various consumer durables, e.g., cars, clothes dryers, refrigerators, air conditioners, and the like. This means that rational and benevolent regulators know better and must force Americans to change their choices for their own goods. For example, the Obama Administration recently proposed to set corporate average fuel economy (CAFE) standards for cars at 54 miles per gallon by 2025.

To justify these new fuel economy standards, the EPA and DOE's National Highway Transportation Safety Agency Administration recently performed benefit-cost analyses that came to very similar estimates. Since there's not much difference, let's just look at how Gayer and Viscusi deconstructed the EPA analysis. The EPA estimates that the total costs of its fuel economy regulations at $192 billion and its benefits at $613 billion. You might think that the sort of benefits would chiefly concern the EPA involve internalizing the costs of externalities like global temperature increases as the result of greenhouse gas emissions and health benefits from abated air pollution. You would be wrong.

As Gayer and Viscusi note, the EPA estimates that those climate change and health benefits actually amount to $46 billion and $8 billion respectively, about 9 percent of the total estimated benefits. However, the EPA's estimate of the climate change benefits from its regulations include the benefits to other nations of reduced U.S. greenhouse gas emissions. "To the best of our knowledge, this is the first situation in which the benefits to other countries other than the United States have been included in a regulatory impact analysis," observe the researchers. Counting only domestic climate change benefits from the CAFE regulations reduces the benefits from $46 billion to a range of $3 to $11 billion, thus accounting for only 0.6 to 2 percent of total estimated benefits. "The estimated costs of the regulation are 18 to 60 times greater than the domestic greenhouse-gas benefits," note Gayer and Viscusi.

Since the environmental benefits play a clearly incidental role in the EPA's analysis, the vast majority of the estimated benefits rests on the assumption that Americans are irrational when it comes to buying automobiles. The EPA calculates that its proposed fuel economy standards would produce $444 billion in lifetime fuel savings, $71 billion in consumer surplus from additional driving, and $20 billion saved from less time refueling. But should fuel economy really be the paramount consideration when it comes to purchasing automobiles?

Gayer and Viscusi point out what is obvious to everyone except DOE and EPA regulators. Consumers value other attributes of automobiles including acceleration, handling, leg and head room, riding comfort, safety, braking ability, reliability, styling, and trunk storage. "Choosing a car other than a Toyota Prius, a Nissan Leaf, or a Chevrolet Volt is not an inexplicable quirk of individual behavior but generally stems from valuation of car attributes these models do not offer," observe Gayer and Viscusi. Not to mention their premium pricing relative to similarly sized and equipped conventional models.

In fact, a recent Massachusetts Institute of Technology study found that automobile fuel economy actually increased by 60 percent between 1980 and 2006, but at the same time the average curb weight of vehicles increased 26 percent, while their horsepower rose 107 percent. American consumers preferred to channel the fuel savings into bigger and more capable vehicles which means that average fuel economy only increased from 23 to just 27 miles per gallon. This hardly is irrational or an example of market failure.

In any case, do car buyers really myopically underestimate the lifetime costs of fueling automobiles? Not really. In a new National Bureau of Economic Research study, "Are Consumers Myopic? Evidence from New and Used Car Purchases" [PDF], the researchers conclude that "there is little evidence that consumers dramatically undervalue changes in expected future fuel costs." The researchers also review similar recent studies and report that after taking consumer preferences into account, there might be an annual welfare loss of $1 billion as a result of underestimating future fuel prices. To get a sense of the magnitude of this alleged loss, keep in mind that the sale of used and new vehicles totaled $635 billion in 2010 and motor fuel sales were nearly $300 billion [PDF]. And even if consumers are really totally unable to take into account future fuel costs, the EPA's mandate that each new vehicle carry a Fuel Economy and Environment Label surely addresses that problem.

Without the assumption of pervasive consumer irrationality, the costs of the EPA and DOE automobile fuel economy regulations are more than double their alleged benefits. Gayer and Viscusi also parse the benefit-cost analyses of new DOE regulations for clothes dryers, air conditioners, and light bulbs and they find again that the costs of the regulations outweigh the domestic environmental benefits once the assumption of consumer irrationality is dropped.

So why are regulators so eager to assume that Americans are irrational? Because they suffer from a bit of myopia of their own. "Agency officials who have been given a specific substantive mission have a tendency to focus of these concerns to the exclusion of all others. Thus, fuel efficiency and energy efficiency matter, but nothing else does," conclude Gayer and Viscusi. "Perhaps the main failure of rationality is that of the regulators themselves." Seems likely.

NEXT: Gary Johnson Pitches Inclusion in Debates

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  1. Well, if everyone drove a Smart, there would be no need for parallel parking.

    1. A Smart is just as dangerous as a motorcycle, with none of the coolness.

  2. I call vice-president!

  3. Not to disparage the article, since there can never be enough of them, but this is rather duh. Par for the course. I’m especially not surprised about bureaucrats basing their assumptions on one factor they choose; in this case fuel economy.

    As the article points out, there are many other factors we idiotic consumers consider. For example, I’d like to buy the Fiat Uno but I have a seven year-old daughter. I don’t think it’s wise to do so given the size of the car unless I have another vehicle – currently a Jeep Liberty.

    Here in Canada a 4×4 in the snow is practical. It’s not fuel economical but to me, it’s a decent enough trade off.

    The only problem is the Jeep has little room. Compared to my Tribute (or he Ford Escape) which was much more spacious but wasn’t a 4×4 so it sucked in the snow.

    1. RJF: I don’t think that most people realize that the “benefits” of energy regulation stem mostly from restricting consumer choice. Oh sure, the EPA goes on about how much money people will save but the regulators curiously fail to mention the other aspects of products that will be missing or cost more.

      1. Wow. I’m turning this thread into a poster.

        I agree with you and I learned this notion, interestingly enough, as a daycare owner.

        Quebec began offering $7 a day care in 1995. On its surface it was an absurd concept fiscally and it remains so now to me. It actually costs the government roughly $53 a day to run it. I charge $40-45 and I’m considered “expensive.” But who’s more efficient for society?

        The government conditions people to believe they’re getting some mystical benefit (and believe me 90% of the regulations they force on me are not empirically backed by evidence but I have to comply in order to get a permit) but in the end the system is neither fair nor financially sound.

        The only rarionale I’ve heard is a study done arguing the fact that women go back into the labor force and add to the GDP more than offsets the costs associated with daycare.

        I’m still undecided on that one.

        Anyway. I think it’s all the same; EPA, daycare etc. Bureaucrats decide assuming we don’t know better and they know how to move a society forward.

        On this, I’m thoroughly decided – in th negative.

        Thank you for the response.

    2. It’s “duh” to Reason readers, but not to the “experts” who impose this kind of crap on us.

    3. Here in Canada a 4×4 in the snow is practical. It’s not fuel economical but to me, it’s a decent enough trade off.

      Obviously the solution is to outlaw living in places that get snow.

      Stupid Cannuk.

      1. A sign of market self regulation! The evil 4×4 raises global temperatures until all the snow melts, and the consumer can now buy that delicious Prius with little fear.

      2. Reminds me of Kinison’s Africa bit.

      3. Or places that need air conditioning.

        Outlaw 4x and a/c! Then people will migrate to better climates.

  4. In any case, do car buyers really myopically underestimate the lifetime costs of fueling automobiles?

    Wrong question; it’s the lifetime cost of owning and operating the automobile.

    Paying an additional twenty thousand dollars in order to save a few thousand on fuel costs is what morons do. Every time I see one of those Chevy VOLT ads I want to shoot my teevee full of holes.

    And- how many people will buy a hybrid once the warranty has expired?

    1. “Wrong question; it’s the lifetime cost of owning and operating the automobile.”

      Ding ding ding ding ding

      There are also lifetime benefits, e.g. a low-MPG Jeep might literally save someone’s life, but at the very least, enable him/her to have experiences that would be impossible in a Smart Car or whatever.

      Another myopia: the assumption that every car buyer lives in or immediately adjacent to a large city with mild wather, uses the vehicle for nothing but commuting to work, and watches TV at home for recreation.

      1. “weather”

      2. Another thing people do wrong. They focus on the monthly car payments – ie getting them as low as they can. What they should do is get the FINAL overall price.

        1. Sorry to nitpick – but its late:
          Whether they care about monthly payments versus final price is somewhat set by how liquidity fits in their objective function. Overall price is not necessarily the defining factor.

          1. I always check back.

            I meant that people who focus on monthly payments as being a measurement of a great deal shouldn’t.

            You should always consider the overall final price – period.

    2. Every time I see one of those Chevy VOLT ads I want to shoot my teevee full of holes.

      Careful, you don’t want to exceed your annual TV purchase limit.

      1. China has infinite strip mines, full of infinite chemicals, for infinite batteries. The pollution isn’t in the US, therefore it doesn’t exist.

        1. dinkster| 8.21.12 @ 7:57PM |#
          “China has infinite strip mines, full of infinite chemicals, for infinite batteries. The pollution isn’t in the US, therefore it doesn’t exist.”

          Sarc or stupidity? You decide

          1. I see you’ve taken a liking to me. I feel all fuzzy inside.

  5. It’s also important to point out that the truly informed consumer knows that you simply cannot bank on those lifetime “savings” from driving a hybrid car or buying an efficient appliance.

    I am painfully aware, for example, that tax-hungry government at all levels is looking at imposing per-mile-driven surcharges, precisely because they are afraid that increasing fuel economy will decrease their gleanings from the gas tax.

    I am also aware, for another example, that utilities are exploring using so-called “smart meters”, to be able to change the rate I’m paying for electricity based on overall usage patterns. So if I buy an efficient appliance but then use it at the wrong time, they’re just going to fuck me in the end anyway.

    1. Pepco in suburban DC is now forcing its **cough** customers to take a smart meter, which basically allows them to brown out your house during peak times, in exchange for better rates.

      Not enough of it’s selfish and irrational customers thought that was a fair trade-off and most didn’t enroll in the previously voluntary program. The joke’s on them.

      1. Here’s where I chime in, because pre-smart meter your high-current appliances were turned down or off during peak hours by the injection of 1050Hz ripple into the power supply. Zellweger Off-Peak plants are still all over the UK, using huge electric motors to introduce the ripple. Many heavy appliances detect it and switch to low power mode.

  6. American consumers preferred to channel the fuel savings into bigger and more capable vehicles which means that average fuel economy only increased from 23 to just 27 miles per gallon. This hardly is irrational or an example of market failure.

    “Market Failure” ends up being “What People Should Be Buying But Don’t,” in the mind of an authoritarian asshole. That is, for those we politely call “liberals.”

  7. Slightly OT, about the Smart Car: A Honda Civic seats 5, has 12.5 cubic feet of storage, and gets 40 mpg highway. The Smart Car seats 2, has 7.6 cubic feet of storage, and gets 38 hmpg highway. Why does this car exist again?

    1. SLD applies. If they can convince enough suckers to buy ’em for enviro-cred or whatever, more power to ’em. Unless they’re getting subsidies.

        1. Ooh, ooh, I know the government answer to that problem…. Outlaw larger-sized cars!!!! It’s perfect!

      1. I should have added this:

        ARLINGTON, VA ? Three front-to-front crash tests, each involving a microcar or minicar into a midsize model from the same manufacturer, show how extra vehicle size and weight enhance occupant protection in collisions. These Insurance Institute for Highway Safety tests are about the physics of car crashes, which dictate that very small cars generally can’t protect people in crashes as well as bigger, heavier models.

    2. Because its cute as a button

      I suppose if you live in a big city and have trouble finding street parking, you could install french doors and park it in the foyer.

      1. Are buttons cute?

      2. Re: DaveSs,

        Because its cute as a button

        Maybe a squashed, sun-melted button.

        If you want a cute micro-car, the best out there is the Fiat 500.

        1. The Sunbeam Tiger was the last great micro car. 2650 lb. British 2-seater sports car with a V8 engine in it.

          That’s a concept that I’d love to see brought forward, with modern drivetrain, suspension technology, and rubber.

          It could get decent gas mileage, too, if anyone gave a shit.

          1. Miata with a Mustang V8?

            1. Monster Miatas were great. I haven’t seen anything about them in a few years, but they were fairly popular around the suburbs of Houston where I grew up.

        2. I prefer the Mini over the Fiat

          Really wouldn’t want any micro car because they are pretty much useless for anything but commuting.

          As has been already mentioned, there are larger vehicles that get better fuel economy and offer far more utility.

    3. It exists in Europe because the extremely narrow streets make parking very difficult. I have no idea why it exists in the US. Sales figures would indicate that most US buyers don’t know why it exists here either.

      1. Hence why Piaggio invented the Vespa in Italy. It makes sense to have smaller vehicles/bikes there. Parking in France and Italy is a challenge. Hilariously, my cousin had a Pathfinder in Paris and always wondered how he avoided smashing cars.

    4. And it even worse when you look at the prices – the base Honda at $15,750 is only 3 grand more than the base Smart and includes as standard things like power steering, a 140 hp (versus 70 for the Smart) engine, power windows (an option on the Smart).

      THe engine capability is what makes the Smart seem so ridiculous – the Smart is barely more efficient at a cost of 70 hp and the loss of interior space. It only gains a 2 MPG efficiency advantage and is slightly more maneuverable in tight spaces – which is mostly moot since parking spots are designed with small cars like the Civic in mind anyway.

    5. Compared to “generic European diesel,” even that Civic is a hunk of crap.

      1. dinkster| 8.21.12 @ 7:58PM |#
        “Compared to “generic European diesel,” even that Civic is a hunk of crap.”

        I’m guessing Euro-whacko, right?

        1. Diesel-whacko, maybe.

    6. @Scarcity.
      The full size ’96 Buick Park Avenue I owned had a 3.8 V6, Seated 6, had a 20 cubic foot trunk, and consistently achieved 30 mpg on road trips loaded down with the family and luggage.
      By that standard, the Smart Car should achieve over 100 mpg.

  8. However, it could cost too much for thousands of affected people breathing bad air to assert individually their rights.

    That is a possibility (and a scenario only possible in a big populated area, like a city) but hardly the result of market failure. It is instead the result of people choosing to live in a polluted area for the comforts afforded by living in close proximity of other producers. To think that people do not take into account these tradeoffs is asking to saying you can read minds.

    This would be a genuine case of market failure and provide a rationale for government to step in with pollution taxes or command-and-control regulations to cut air pollution in such a way as to increase the net benefits to society.

    Leaving aside the legitimacy of the concept of market failure, even if you have a scenario of too many polluters, the fact is that government regulations could not address the problem as they would lack the knowledge to correctly price the pollution. Since the goal is to cost the pollution to signal the market (e.g. people), you need a mechanism that can accurately price this pollution, that is to signal the scarcity of a cleaner environment. If a government cannot price otehr stuff correctly, just by the way such enterprises like Amtrak bleed money, there is no reason to believe they can cost pollution correctly, thus their regulatory or tax schemes will always come short.

    1. Just to give you an example, CAFE standards were supposed to make cars less polluting by making them smaller and more efficient. What ended happening was people either buying additional cars or buying the still available trucks. This had to be an unexpected result from the clueless masses of regulators.

    2. “is akin to saying you can read minds.”

      Sorry.

    3. This is a very good point. Thanks for the insight.

  9. So why are regulators so eager to assume that Americans are irrational? Because they suffer from a bit of myopia of their own.

    And arrogance. And self-absorption. And narcissism.

    1. OldMex, you are close to the Buddha of this discourse.

      Significant pretentiousness to mind-reading and arrogance and self-absorption and narcissism get de-selected in a free market, so you and I join the majority of comments above in asserting that regulators are incompetent tyrants. But where did Regulators come from?

      The prize is not embarrassing regulators or regulatory agencies. That is part of the job. The prize is discrediting regulation itself, which is your strongest line of attack:

      “government regulations could not address the problem as they would lack the knowledge to correctly price the pollution”

      Bingo. Austrian Praxeology and Catallactic analysis proves that 3rd parties cannot know the decision factors of a group of buyers/sellers without enormous investigative costs to investigate each individual buyer/seller.

      As you alluded to, the market failure concept is itself a failure. Free, property-rights based markets cannot fail. If negative externalities occur due to the actions of a large manufacturer, for example, affected parties can pool their stories if necessary and get a law firm to take the case on contingency if the case is good. But the lawyer market must also be free to accomplish this.

    2. The Vicious Triad: Monopoly-Nanny Politician-Regulator.

      The Regulatory State is an abomination made possible by
      1) crony/corrupt govt protection of monopolies, who incompetently commit abuses, then
      2) The Nanny Politician comes in to save the day with a broad based Nanny Law which
      3) Imposes mandates and penalties (costs) on benefits it thinks are negative externalities, or
      4) Subsidizes costs of features it thinks are positive externalities, then
      5) Enforces those mandates with Regulatory Goons who don’t know the widget they’re mangling from their own assholes.

      Regulation is an out of control government function which must be challenged, discredited, nullified in court, repeealed, and if necessary, resisted by extra-legal means. When a law is an unconstitutional tyranny, one is justified in resisting it outside the law, because the tyrannical law is an act of war.

      Regulation is Tyranny in drag. It is the means by which Mussolini, Hitler, and Stalin justified arbitrary raids and shutdowns of businesses they didn’t like.

      Let’s not watch that movie again. Let’s shove the popcorn up their asses first.

  10. Why does this car exist again?

    It’s hard to park in a crowded city. And if you want to advertise that you’re a pussy and should not get sex — I mean, show you’re environmentally conscious — I could see a guy buying one of these.

    1. It’s hard to park in a crowded city.

      Meh. I live downtown Chicago and when I have to drive it’s in an Accord. I occasionally see a spot that a Smart Car could fit into that I can’t, but not often. Bumpers are for bumping.

      I think you’re onto somthing with the self-imposed abstinence program.

  11. Because its cute as a button

    Seriously?

    It’s an outhouse on wheels. Hence horrendous drag, and consequent lousy mileage.

  12. The Denis Leary’s song “Asshole” was running through my head when I read this article! Whale Skin Hubcaps! lol

  13. You want to keep in mind at all times that one party’s policy is dictated by a bunch of busybodies who want to control your choices according to a lot of faith-based, scientifically unproven beliefs.

    Of course the Religious Right are a bunch of buttinskis too….

  14. However, it could cost too much for thousands of affected people breathing bad air to assert individually their rights.

    That’s a problem in may situations, which is why there are class-action lawsuits. Market “failure” averted.

    1. I have yet to see a class action lawsuit that did anything more than enrich the lawyers involved.

      1. If they are intended to enrich the “class” they plead for, then they are a failure. If they are intended to alter the behavior of the target, they can occasionally be said to succeed.

  15. How much of that increased curb weight is actually due to consumer demand and not safety standards?

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  17. So why are regulators so eager to assume that Americans are irrational? Because they suffer from a bit of myopia of their own. “Agency officials who have been given a specific substantive mission have a tendency to focus of these concerns to the exclusion of all others. Thus, fuel efficiency and energy efficiency matter, but nothing else does,” conclude Gayer and Viscusi. “Perhaps the main failure of rationality is that of the regulators themselves.” Seems likely.

  18. Since there’s not much difference, let’s just look at how Gayer and Viscusi deconstructed the EPA analysis. The EPA estimates that the total costs of its fuel economy regulations at $192 billion and its benefits at $613 billion. You might think that the sort of benefits would chiefly concern the EPA involve internalizing the costs of externalities like global temperature increases as the result of greenhouse gas emissions and health benefits from abated air pollution. You would be wrong.

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