Heterogeneous (Mis-) Perceptions of Energy Costs: Implications for Measurement and Policy Design
Quantifying heterogeneity in consumers’ misperceptions of product costs is crucial for policy design. We illustrate this point in the energy context and the design of Pigouvian policies. We estimate non-parametric distributions of perceptions of energy costs in the U.S. appliance market using a revealed preference approach. We show that the average degree of misperception is misleading— while the largest share of consumers correctly perceives energy costs, a significant share undervalues them, and smaller shares either significantly overvalues or completely ignores them. We show that setting a tax based on mean misperception deviates substantially from the optimal tax that accounts for heterogeneous misperceptions. While correctly characterizing misperception is crucial for setting optimal Pigouvian taxes for externalities, it is less important for setting optimal standards. We find that standards can largely outperform taxes. Standards’ advantage is they reduce variance in energy operating costs relative to taxes, which internalizes distortionary effects from misperceptions.
We would like to thank Meredith Fowlie, Christopher Knittle, Richard Newell, Ryan Kellogg, Frank Wolak, Thomas Colvert, Kochiro Ito, Anna Alberini, Akshaya Jha, Tomomichi Amano, Tatyana Deryugina, Kenneth Gillingham, Arthur van Benthem, Joseph Aldy, in addition of numerous seminar participants. The U.S. Department of Energy and the National Science Foundation provided funding for this project through the NBER Economics of Energy Market program. This research is also part of the activities of SCCER CREST, which is financially supported by the Swiss Commission for Technology and Innovation (CTI) / Innosuisse. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.