A recent wave of government regulations mandates the energy efficiency levels of a wide range of consumer and business products, including passenger cars and commercial vehicles, clothes dryers, air conditioners, and light bulbs. The ostensible purpose of these regulations is to reduce pollution, notably greenhouse-gas emissions. But our recent examination of a number of these regulations reveals that, by the agencies’ own analyses, the regulations have only a negligible effect on greenhouse gases, and the environmental benefits are vastly outweighed by the costs of compliance.
The agencies attempt to mask this finding by claiming that the regulations save consumers and firms money, by forcing them to buy more expensive energy-efficient products. By asserting, with little to no supporting evidence, that consumers and firms are making irrational decisions in their purchases of energy-intensive products, the agencies can then claim that energy-efficiency regulations provide private benefits by correcting for this irrationality, and they then use these benefits to justify the expensive regulations that yield minimal environmental gains.
This dismissal of consumer choice deviates from the long-standing methodological practice of cost-benefit analysis—and runs contrary to the guidelines set out by the Office of Management and Budget—in which it is assumed that informed citizens are better able than government bureaucrats at making private purchasing decisions that affect their own bottom line. This is not to say that people are infallible; only that the baseline assumption—supported by much empirical evidence—is that in most contexts consumers with heterogeneous preferences, financial resources and personal situations, are better equipped than analysts and policymakers to make market decisions that affect themselves.
The agencies instead assert consumer and firm irrationality with a generalized appeal to the behavioral economics literature. Behavioral economics seeks to find systematic deviations from rationality and integrate them into economic models, but it does not provide a rationale for taking away consumers’ and firms’ ability to make their own decisions in most market contexts. Rather than just assert irrationality to justify all types of regulations, it is essential for the agencies to document the existence and magnitude of behavioral anomalies in the market they are considering regulating. And where such anomalies are found, the agencies should first resort to less intrusive regulations, such as providing clearer information to consumers and firms in order to help them in their decision-making. Cass Sunstein, the current director of the government office in charge of overseeing the agencies’ regulatory analysis, espoused this policy lesson in his co-authored book called Nudge. To “nudge” is to lightly regulate, primarily through information provision, rather than the current government practice of mandating which products consumers and firms can and cannot purchase.
Perhaps the main failure of rationality is that of the regulators rather than the consumers and firms. Agency officials who have been given a specific substantive mission have a tendency to focus on these concerns to the exclusion of all others. Thus, fuel efficiency and energy efficiency matter, but nothing else does. In effect, government officials are acting as if they are guided by a single mission myopia that leads to the exclusion of all concerns other than their agencies’ mandates.
This agency myopia fosters bad policies. By abandoning the principle of consumer sovereignty, regulatory policy shifts from an appropriate role of mitigating the harm that individuals impose on others through pollution towards a paternalistic emphasis on mitigating the harm individuals impose on themselves. We wind up with more consumer protection (in contexts where there is little to no evidence that it is necessary) and less environmental protection. And if government agencies can justify regulations on the premise that consumers and firms (but not regulators) are irrational, there is no limit to the expansive use of regulatory powers to control and constrain market choices.