Overriding Consumer Preferences with Energy Regulations

Cost-benefit analyses traditionally assume that informed citizens are best able to understand and choose among the available options for the one that best meets their own interests. An individual planning to buy a car, for example, would understand that a large sedan has worse gas mileage than a compact car and would incorporate into her purchase decision the higher expense of gas over the period she expects to own the car. These expected fuel costs would be considered along with all of the car’s other characteristics, including trunk size, comfort, and so on, to make a decision. Thus, regulations that alter consumers’ choices are assumed not to have any private net benefits. A regulation that requires consumers to buy a more expensive, more energy-efficient product, for example, may produce social benefits from reduced pollution, but it will not otherwise make the consumer herself better off.

In a departure from the traditional practices of cost-benefit analyses, recent regulatory analyses have incorporated private benefits under the assumption that consumers have made suboptimal purchasing decisions. In effect, these analyses assume regulations have benefits to consumers because they mandate them to buy products that the government believes make them better off. In a just released working paper co-written with W. Kip Viscusi, we examine a number of recent energy regulations proposed or enacted by the Department of Energy, the Department of Transportation, and the Environmental Protection Agency. Among other things, we find that the preponderance of the benefits associated with these regulations stems from private benefits to consumers of lower energy costs, which is based on the agencies’ poorly-supported assumption that consumers and firms make irrational purchasing decisions. Without these benefits, the regulatory costs greatly exceed the benefits, and the environmental benefits of these regulations are minor.

A link to the paper is available at the Mercatus website (PDF).