Free Choices

The concept of legally-enforced performance standards for buildings and equipment makes a lot of economists uneasy. It goes against the notion of free markets and the sense that people can make rational decisions for themselves, based on their own needs, far more accurately than any group of experts. There's a lot to be said for this perspective.

For example, under proposed regulations, a few years from now, it may be nearly impossible to find an ordinary incandescent light bulb. “Good!”, shout the proponents of energy efficiency. “After all, those things get out only 10 or 15 lumens/W of power input.”

“But wait!” counter the economists. “What if that light will be on only rarely. Perhaps it's in a seldom-visited closet. How can the extra expense of an energy-efficient light source be required, when it may never pay back the purchaser over a lifetime of use?”

It's a valid point and serves to illustrate the quandary. There's no question that minimum performance standards reduce choices in the marketplace. For some applications, performance standards boost overall costs to consumers and may even provide less satisfactory performance. The counter argument runs that in the more general case, minimum performance standards tend to eliminate bad choices.

Consider the origin of minimum energy-efficiency standards for refrigerators, first put in place in California in the late 1970s, under Title-20. Until then, refrigerators had grown steadily in size, as well as in power consumption. The refrigerator was the largest single consumer of energy in most houses. Average steady-state power was around 200 W, and it was not unusual to find refrigerators which consumed 250 W.

The method used to derive the first efficiency standards was not overly theoretical. Researchers measured the power of a wide variety of models available in stores. Some refrigerators used a lot of energy, others a lot less. Some were large and expensive, others cost less. The researchers simply drew a line under a population of reasonably priced, sized, and energy-efficient models they found. Regulations were adopted after a public hearing, and models which used less energy could be sold in California. Those which used more could not.

After all was said and done, most manufacturers were able to produce refrigerators efficient enough to be sold in California before the regulation went into effect. Predicted drastic price increases never materialized. It seemed that the main barrier to energy efficiency had simply been that no one was paying attention to it. Since then, through successively tighter rounds of efficiency standards, and the adoption of federal standards in the early 1990s, the energy used by refrigerators has dropped to roughly a third of what it had been in 1976. Indeed, the steady-state power consumed by the economically-priced, 21-ft³ refrigerator in my kitchen is around 70 W.

Free market economics relies on a concept called rational expectations, which is the notion that in the aggregate consumers have ideal knowledge about product qualities and accurately weigh the factors to maximize their benefits. To many, this seems absurd. Buying decisions are based on dramatically incomplete information. Refrigerators are sold on the basis of utility — the space they enclose — and limited by the space available, the floor space they occupy in kitchens. This puts the squeeze on insulation, which can't be immediately perceived, and so is valued much lower.

Other important factors, such as reliability, are based on brand reputation and the expectation that the retailer will be there to honor warranties and provide parts. The minimum performance standards have done part of our selection for us, by ensuring that the product we buy will meet a reasonable energy consumption expectation.

Perhaps the economists would admit that the government which we freely choose is one which helps make this choice, or at least provides an unbiased source of information in the form of yellow labels which inform us on energy usage. In this way, through our selection of government policies, we are providing ourselves with better-though still imperfect-knowledge of how a piece of equipment or an entire building will perform.

In that spirit, perhaps we would do well to go beyond energy standards for products. What good is an efficient product if it doesn't last? My house features an entire shelf of compact fluorescent lights which failed far sooner than the expected 10,000 hours. If public funding had been available to test, publicize, and perhaps regulate reasonable minimums or at least claims on lifespans of these lamps, a much greater collective expenditure by myself and millions of others could have been avoided. As it turns out, the Energy Star label is doing some of that for us, and avoiding the kind of free market madness which still exists in much of Asia.

This experience begs a question: Shouldn't people make a free choice of government which helps them make intelligent product selections, based on better information and analysis than an individual would normally have?