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Spitzer: consumers have too many choices II

Spitzer's suit, and the underlying Congressional law it seeks to enforce, is notable for its unspoken—and apparently unreported—assumption. It's one thing for there to be mandatory restriction of consumer choice when there are externalities or collective-action problems that are not reflected in the price. The classic example is regulation of auto exhaust emissions; if I am to purchase a car, I would bear all the costs of installing environmental controls, but I receive an infinitesmal percentage of the benefit from making my car less smog-producing. Other than the occasional insufferable Toyota Prius owner (a group that counts me and my brother as members), very few people voluntarily pay extra to reduce their emissions; consumers do not bear the social cost of the smog that their auto produces. By requiring all new cars to meet certain environmental standards, government regulation can solve the collective action problem. One can quibble with the implementation of the idea—an emissions tax might be more efficient if technology existed to make the administrative costs of measurement of emissions low enough; California's "grandfathering" of old cars means that 5% of the vehicles in California produce half the state's smog—but the theory is reasonably sound.

But when it comes to "energy efficient" appliances, the cost is "consumers use more energy." Every major appliance in America is sold with a prominent yellow sticker indicating its electricity usage. Consumers can decide for themselves whether they wish to pay for the extra kilowatts; some utility regulators have even required utilities to subsidize consumers' purchase of energy-efficient appliances, on the theory that doing so would be cheaper than building a new power plant.

If consumers are purchasing energy-hog washers and dryers and refrigerators, it's because they're willing to bear the extra costs of the energy. So there's no social problem—unless Eliot Spitzer and Congress think that electricity prices, like prices for smog-producing cars, do not reflect the true social cost of electricity. If so, there's an easy way to get consumers to use a socially efficient amount of electricity while internalizing any externalities from electricity usage: add a tax reflecting these social costs to bill for electricity, which, unlike auto emissions, is readily measurable through the existing infrastructure. Raising the tax (which can be made revenue-neutral through a cut of taxes on socially beneficial activity, such as working, which New York taxes between 4 and 7.7%) would then allow the market to decide the cheapest way to reduce electricity usage, which would be a much more efficient result for consumers than a top-down bright-line appliance-by-appliance diktat, and one that would require many fewer bureaucrats and pages in the Federal Register. So the New York Times is guilty of omitting the lede: the story is not "AG Spitzer sues to make appliances more energy efficient," it's "Aspiring Governor Spitzer thinks electricity prices aren't high enough."



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.