National chooses not to rule ‘by decree’

It looks like National has decided not to continue with the previous government’s plans to introduce a standard for lightbulb efficiency. They say

We want to encourage people to [switch], we think there may be benefits for them to do it, but it should be a choice they make as consumers.

It’s a good point: efficient CFL bulbs are tough to dim, take time to reach full brightness and don’t bring out the sparkle in chandeliers, apparently. So why would we want to force everyone to use them when they’re clearly not suited to some applications? Of course, if people did use them in their homes and offices, where they are suitable, it would be great for reducing our national power consumption.

What we really need is a solution which encourages people who don’t really need the current incandescent bulbs to switch, but allows those who truly benefit from incandescent bulbs to keep using them. An efficiency standard is too crude a tool to allow that to happen. However, if we could price power at its true marginal social cost, then people would make efficient decisions of their own accord. That is the beauty of carbon taxes/cap-and-trade schemes: we no longer need to worry about fine-grained regulation of things like lightbulbs, because the price signals sent by our emissions regulation will sort those things out for us.

Sadly, it seems that the implementation of such a carbon pricing scheme is now some way off. So, what options might the government have for getting people to switch without reducing their choices ‘by decree’? One such option, that works extraordinarily well, would be to change the default lightbulbs that you receive with goods. For goods that include bulbs, or for fitting out new houses, make the default option a CFL bulb, rather than an incandescent bulb. While it doesn’t change peoples’ choice set – they can still use an incandescent bulb if they prefer – it would give people exposure to the efficient bulbs, and it would switch indifferent consumers to the more energy efficient model.

Can anyone think of other options National might have gone with that don’t amount to ruling ‘by decree’?

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  • Robbie Allan

    “…if we could price power at its true marginal social cost, then people would make efficient decisions of their own accord.”

    There’s an implicit assumption here that people behave in ways that are, or at least appear to be, rational. Perhaps if this weren’t the case, we could justify central intervention?

    The Herald article tells us that efficient lightbulbs stack up already, which leads us to one of three conclusions.

    The majority of the population that aren’t using the light bulbs are:
    a) Not using them because they need to use a dimmer, heat food, or want some more sparkle in their chandelier
    b) Using a higher discount rate for expenditure than the NZ Herald
    c) Just not doing the maths and making silly financial choices

    Perhaps it’s c). Perhaps, like me, there are loads of people out their that pay off their credit card late, even when they don’t need to, just because they’re forgetful and don’t prioritise their time properly. Perhaps the power consumption of appliances is too hard and boring to figure out, and it just seems easier (if foolish) to minimise the up front expenditure.

    If this is the case, perhaps we can justify central intervention due to an inability (or unwillingness) on the part of individuals to make decisons that are in their own best interests? I’d suggest that in some instances, perhaps it’s necessary for a well functioning economy and society that the government saves us from ourselves.

    Sure, it impinges on our technical liberty. Sure, there’s often a more and less effective way to do this. Sure, the Government doesn’t have a track record of always picking the former. It raises thorny issues about a Government repudiating our behavior and making us do ‘what’s good for us’.

    Maybe it’s possible, however, that in some instances having central regulation doing the maths for us (eg. no sane person would not want to have double glazing if they live in the South Island) save us time and effort?

  • looking at this quote form the herald article it would have to be a pretty astronomical discount rate for B) to be the reason:)

    “CFLs typically use a fifth of the energy of an ordinary lightbulb. So based on an electricity cost of 20c/kWh, a CFL used 3 hours a day throughout the year will cost $4.40 compared with $21.90 for a standard bulb – a saving of $17.50 per year per bulb.”

  • dant03

    I will probably add a post on this when time allows, but without getting into the whole carbon tax/emissions trading debate etc, there does appear to me to be a role for this type of regulation – although not necessarily in the way this was done.

    I wonder if any readers have thought about the trade effects of NOT phasing out incandescent bulbs? Given that Australia announced this policy some time ago, what are the implications for New Zealand of ‘going it alone’ and persisting with CFL’s???

  • steve

    “Perhaps it’s c). Perhaps, like me, there are loads of people out their that pay off their credit card late, even when they don’t need to, just because they’re forgetful and don’t prioritise their time properly. Perhaps the power consumption of appliances is too hard and boring to figure out, and it just seems easier (if foolish) to minimise the up front expenditure.

    If this is the case, perhaps we can justify central intervention due to an inability (or unwillingness) on the part of individuals to make decisons that are in their own best interests? I’d suggest that in some instances, perhaps it’s necessary for a well functioning economy and society that the government saves us from ourselves.”

    I have an alternative. People place different values on the type of lights in their home. For those where money is limited they probably have a higher discount rate, and therefore purchase the cheapest bulb initially. For people with lots of money, they probably buy expensive bulbs, and aren’t too worried about the electricity they use, they just want what looks best in their home. Yes the sums may add up for you, that it is worthwhile spending a little extra now, to reduce your power bill. But for someone else, that little extra can go towards other things and lets worry about the power bill later. Yes it might even go towards cigarettes or alcohol. But if that’s what gives someone enjoyment rather than cheaper power and what they consider bad lighting, then why not? Who are we to decide that they are wrong?

    People have different preferences and should have the freedom to choose. It is ridiculous for the government to intervene in this.

  • dant03

    Above, obviously I meant ‘what are the trade effects of NZ going it alone and NOT phasing out incandescents’ (not CFL’s!).

    I think that people are completely missing the point with the types of comments being posted.

  • goonix

    “I have an alternative. People place different values on the type of lights in their home. For those where money is limited they probably have a higher discount rate, and therefore purchase the cheapest bulb initially. For people with lots of money, they probably buy expensive bulbs, and aren’t too worried about the electricity they use, they just want what looks best in their home. Yes the sums may add up for you, that it is worthwhile spending a little extra now, to reduce your power bill. But for someone else, that little extra can go towards other things and lets worry about the power bill later. Yes it might even go towards cigarettes or alcohol. But if that’s what gives someone enjoyment rather than cheaper power and what they consider bad lighting, then why not? Who are we to decide that they are wrong?
    People have different preferences and should have the freedom to choose. It is ridiculous for the government to intervene in this.”

    This.

  • Robbie:

    If people don’t behave in a predictable (on average), boundedly rational fashion then what policy would you recommend? If you have no idea what they want because you can’t use revealed preferences, and don’t know how they will react to regulation then it’s pretty hard to justify any regulation.

    By proposing anything you’re making SOME assumption about how people will react to regulation and forming some model. I don’t know what better model we have at present than the boundedly rational one that most eocnomists use.

    dant03:

    Do you think that we will be discriminated against in trade talks because of the lightbulbs we use in our homes???

  • dant03

    Okay, in answering your question:

    (1) the government won’t (or rather, wouldn’t) be banning incandescents per se. They would be applying minimum energy performance standards (MEPS) to household lighting. Much the same way as we have been doing for years for a number of other appliances

    (2) to learn more about MEPS, go to http://www.eeca.govt.nz/labelling-and-standards/meps.html

    (3) the web-page in (2) will refer to the full range of MEPS being listed on an Australian website.

    WTF?!?!? So I am not talking about trade talks, more existing trade arrangements.

  • Robbie Allan

    @Steve

    Yup, totally correct. It’s entirely possible, and a suggestion that goes to the heart of economics, when we say that we can’t be sure that individuals aren’t consciously choosing to buy rather than bulbs.

    I suggest though, that we can’t necessarily say that people always know what’s best for them, that’s an ingoing assumption. We can hypothesise that, and I guess I’m exploring how we might work things if we relaxed that a bit.

    @Rauparaha

    Perhaps the policy response is to get some people in a room. Have some “neutral party” (let’s assume away the problems associated with this for a moment) explain to a group of 30 people about light efficient bulbs. Have them do the math themselves. Then ask them again whether they’ve changed their minds and would choose to buy them.

    If more than X% of people opt for the bulbs, then legislate it on the basis that pretty much everyone would buy them if they understood, but just don’t for some reason. If you want a model for why not, how about classic information asymmetry and searching costs, as well as availability bias and time inconsistency.

    Practically I think we could get a pretty good approximation of this scenario, and then the government could look at policy responses, whether it’s subsidising lightbulbs, banning normal ones, whatever. Then look at the resultant ineffencies (overconsumption, loss of sparkle etc.) and weight up the intervention on that basis.

    I think if you ran this exercise for seat belts, you’d decide to legislate for them…

  • Robbie:

    That’s an interesting idea. I guess you’re saying that focus groups could help us to figure out what sort of things are stopping people from buying CFL bulbs. Once we’ve figured out what the problem is, we can form our model and take appropriate regulatory action.

    If, as you suggest, it’s an information problem then maybe education and labelling would work well. I’m not sure how availability heuristics or time inconsistency could cause the problem, though. Could you elaborate on that, maybe?

  • I think a smart ad campaign pointing out that people will actually save money would do the trick – assuming it’s an information assymetry problem.

    That way people like my flat mate could get beyond the perception that energy efficient light bulbs are just for hippies.

  • dant03

    Robbie:

    That is a really interesting and provocative post. So you think that if there are people who, for whatever reason, choose to persist with incandescents (for a wee while until they realise that they are mistaken) it would be okay to regulate against them if the large mass of people think doing so is really silly and not in the national interest?

    If so, I basically am okay with that.

    Rauaraha:

    Information and labelling are all good. But what if people are slow to realise their errors – ie they would change, but it takes a year of information campaigns (expensive) to get through, then there is a period of change. Would it not be more efficient, if we could be sure that ULTIMATELY the large mass of people don’t want incandescents, to regulate? What do you think?

    I think that ultimately the approach taken to date differs from your (impractical) suggestions because of a minor thing called the TRANS TASMAN MUTUAL RECOGNITION ACT.

  • dant03:

    Weighing up the expense of education against the costs of regulation and any ideological objections that the government has is an empirical matter that I don’t have the information to do. Finding that information would probably be a very difficult and imprecise exercise.

    I’m not sure why you think peoples’ suggestions are so impractical. I infer from what you’ve written that you think regulatory consistency with Australia is an issue. However, since National has chosen not to proceed with the standard on largely ideological grounds, it appears that consistency is not as great a problem as you’ve implied.

  • dant03

    Rauparaha,

    I agree that the announcement was made on ideological grounds. I suspect with good reason that the ideological stand was taken without considering the TTMRA issues. National has to do something now that it has made an announcement, but it will be a tricky task given that continuing to allow incandescents to be sold here would undermine any Australian ban. Under the TTMRA any product that can legally be sold in NZ can be sent to and sold in Australia. I suspect that Australia may not be very happy about that.

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  • Robbie Allan

    @Everyone

    Dant03 is right, focus groups are very much me just thinking out loud, but my train of thought is that if we agree that in some instances people do silly things because of a lack of information (due to search costs or lack of availability) or lack of computational power (bounded rationality), then it might be that some central body can improve outcomes through regulation (assuming away regulatory failure).

    Evidence for this is that many actions seem contrary to personal interest (wearing seatbelts, spending money on insulation) and if you do the math for any plausible range of imputs, it’s almost universally a good idea.

    There are a few ways that we can overcome this. Rauparaha very correctly points to education. The big downside with education is that it’s often costly and difficult (getting people to you about an issue they don’t even think is a problem can be tough). Regulation is the alternative, and focus groups was just my way of exploring how we could set a bar for regulation.

    He’s right that striking the balance is tough, how do you weigh up the costs. At a guess it’s fundamentally unknowable. All we can do is rack it up the best we can, make a few guesses and keep reviewing if it’s working.