DISCOUNT RATES AND ENERGY EFFICIENCY

Empirical studies provide compelling evidence that economic agents do not adopt the complete range of energy‐efficient technologies that are cost‐effective under prevailing prices and market conditions. Analysts commonly attribute this anomaly to the use of high discount rates in energy‐related decisions‐an interpretation that is difficult to reconcile with standard models of rational choice. This paper recasts the controversy from the perspective of economic theory and finds that market failures related to asymmetric information, bounded rationality, and transaction costs are major contributors to the so‐called “efficiency gap.”

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