The normative case for demand-side conservation

Abstract

A necessary condition to justify public interventions such as the setting of standards or the introduction of DSM programs is that the consumers’ decisions, which are described by the conditions (2.25) and (2.26), denoted by (e0, η0), are exposed to market failures. Indeed, Hirst (1992) claims that “energy markets do not operate properly.” This entire chapter, except for some remarks in section 1, applies traditional, normative welfare economics. However, the often tacit assumptions, implicitly applied in the conservation literature, are made explicit here. In particular, while consumers are ignorant, stupid or simply erring (e.g., due to bounded rationality) and thus cause market failures, public institutions — like governments, regulators and bureaucracies — are always benevolent, omniscient and omnipotent. These assumptions lead to a serious, in practice often unjustifiable, bias towards interventions. Therefore, the results of normative economics should be applied cautiously. Unfortunately, normative economics is often considered to yield sufficient conditions for public interventions, although these conditions are merely necessary. The conservation literature is no exception. Therefore, an entire chapter, chapter 10, is devoted to positive aspects in order to contrast the traditional normative, and sometimes naive, point of view.