California knows how to ban stuff

The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

10 replies
  1. Briefcases
    Briefcases says:

    This is a silly move on California’s part. In the state where materialism reins, why would they limit what luxuries people have? They need to face facts that they absolutely need to build more power plants. What do they expect to do as electric cars gain popularity creating even more electricity use?

  2. rauparaha
    rauparaha says:

    Isn’t regulation like this really a second best solution when they can’t agree on how to solve the real externality? I presume that one of two things is happenening: Either the state government can’t pass legislation regulation emissions/resource management to protext the environment so they’re trying to manage demand by banning stuff. Or the government is concerned that the transition to a sustainable economy will take too long if they don’t force people’s behaviour to a new equilibrium rapidly.

  3. goonix
    goonix says:

    The Commission might be concerned about a number of things. But the real issue is that, if you’re going to use levers to incentivise behavioural change, you should at least use ones that work. Or are you implying that they may not have had the ‘correct’ lever in their toolbox so resorted to the blunt hammer?

  4. rauparaha
    rauparaha says:

    Yeah, I can see how it might be difficult to implement a ‘good’ lever, such as comprehensive emissions trading. It might be politically easier to resort to crude instruments like banning things in order to suppress energy demand. Or at least appear to be reducing energy demand in order to satisfy your greenie constituents 😛

  5. MoneyBright
    MoneyBright says:

    Ha! I love the title to this post!

    Aside from a title that made me chuckle, however, you make a good point in saying that motivating consumers not to do something is better than banning it altogether. Completely, completely agree.

    Banning things at will is all just a little bit…. dictatorship.

  6. Calgary web
    Calgary web says:

    A Ban can hurt small companies and individuals , so on the surface it looks good but some people still get hurt.not everything is as good as it seems

  7. John Kenpo
    John Kenpo says:

    California is being stupid here. I have no idea why they would want to put such strict energy standards on TV’s. This is going to drive up prices and hurt small companies in California.

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