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Consumer Theory, Home Production, And Energy Efficiency

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  • Philip B. Thompson

Abstract

Arguments about the existence of the so‐called energy efficiency gap are typically based on evaluations of efficiency measures as investments whose end result is to reduce the cost of providing a given level of energy services. This article demonstrates that the investment approach tends to undervalue energy efficiency improvements because it omits the increase in utility that results from the consumer's substitution of energy services for other goods. The substitution occurs because the efficiency measure reduces the marginal cost (implicit price) of energy services. Sample calculations based on a Cobb‐Douglas utility function are used to illustrate the potential size of the undervaluation of efficiency investments.

Suggested Citation

  • Philip B. Thompson, 2002. "Consumer Theory, Home Production, And Energy Efficiency," Contemporary Economic Policy, Western Economic Association International, vol. 20(1), pages 50-59, January.
    • Handle: RePEc:bla:coecpo:v:20:y:2002:i:1:p:50-59
    DOI: 10.1093/cep/20.1.50
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    2. Anne Kesselring, 2023. "Willingness-to-Pay for Energy Efficiency: Evidence from the European Common Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(4), pages 893-945, December.
    3. Banfi, Silvia & Farsi, Mehdi & Filippini, Massimo & Jakob, Martin, 2008. "Willingness to pay for energy-saving measures in residential buildings," Energy Economics, Elsevier, vol. 30(2), pages 503-516, March.

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