Energy Efficiency Policy and Market Failures

The primary objective in this paper is to focus attention on the empirical basis for skepticism about the effectiveness of the market mechanism in yielding cost-effective energy efficiency improvements. The authors present a series of examples that provide evidence for market failures related to energy efficiency. The discuss the role of energy efficiency policies such as standards, utility demand-side management programs, and other government programs that have been used to overcome these market failures. If they are carefully designed and successfully implemented, such energy efficiency policies can contribute to the reduction of the energy efficiency gap. The authors believe that energy efficiency policies aimed at improving energy efficiency at a lower cost than society currently pays for energy services represent good public policy. Programs that lead to increased economic efficiency as well as energy efficiency should continue to be pursued.