Blog Post

Testing for Energy Paradoxes in Competitive Industries

Mar 31, 2016 | Arthur G. Fraas, Randall Lutter

For years economists have debated why so many consumers appear to act irrationally when choosing not to buy energy efficient appliances, lights and heating and cooling systems that provide substantial cost savings—the energy paradox. The view that consumers act irrationally now underlies a large regulatory program by the Department of Energy (DOE), which has issued appliance efficiency regulations covering products ranging from dishwashers to air conditioners to water heaters.

However, recent regulations issued by DOE, the Environmental Protection Agency, and the National Highway Transportation Safety Administration have significantly extended the practical scope of this energy paradox beyond consumers to firms operating in competitive industries. More specifically, in three final rules and one proposed rule covering heavy-duty trucking, regulators have issued regulatory impact analyses that conclude billions in potential savings are lying on the sidewalk. These claims, unfortunately, are not substantiated by direct empirical evidence. This shortcoming is troubling because economists have long held that firms in competitive industries minimize costs in response to competitive pressures.

In a working paper co-authored with Zachary Porter and Alexander Wallace, we present data that we collected to test a key assumption behind the claim that trucking firms underinvest in energy-saving technologies. EPA and NHTSA have argued that heavy-duty trailers are less likely to be equipped with aerodynamic energy saving devices if they are owned by firms different from those whose tractors pull the trailers. In our analysis, we find no evidence that such differences in ownership reduce the use of aerodynamic skirts. We do find that skirt use is consistent with other predictions of conventional neoclassical economic models.

We conclude that regulators should continue to be skeptical about claims that businesses fail to use energy efficient technologies in reasonably competitive markets. In addition, regulators should seek to test empirically the assumptions underlying claims that private businesses act irrationally and that large cost savings can be realized with federal regulation.

Our complete working paper is available from the Mercatus Center at George Mason University: The Energy Paradox and the Adoption of Energy-Saving Technologies in the Trucking Industry.