Economists love prices. In fact, when we want people to reduce their consumption of something, we argue we should make that thing more expensive. This is usually done via a tax. My undergrads know, of course, that how effective a tax is at reducing consumption depends greatly on how elastic demand is. What we have learned from literally dozens of papers is that the residential demand for electricity is not very elastic at all. This means that the tax required to significantly reduce electricity consumption in the short and long run is probably pretty high (even more so if we carefully think about block rate pricing and how rates are set in practice). The literature has focused almost exclusively on measuring the price elasticity of demand.
Enter David Rapson and Katrina Jessoe. In their new working paper “Knowledge is (Less) Power: Experimental Evidence from Residential Energy Use” they describe a field experiment they ran in Connecticut. They randomly selected customers into a peak pricing experiment, where they would send households emails, text messages or phone calls informing them that their price of electricity would rise sharply for a few hours the next day. While these peak pricing experiments are not new, they gave half the group in home displays, which informed customers about their electricity consumption in real time. They of course had a control group of households who neither received peak pricing, nor information.
Their findings made my big neoclassical heart skip a few beats from excitement. Households exposed only to the temporary price increases reduced their demand by 0 to 7 percent, which is a very small response given the magnitude of their price increases. However, for the households with the in home display they observe reductions of 8 to 22 percent. They go to great lengths to show that this difference in response is consistent with learning about one’s consumption patterns. Their evidence also shows signs that once customers have changed their consumption patterns, they stick to them.
Why am I such a big fan of this work? Information is power. We know from a number of Opower type studies that shaming reduces consumption slightly. Matt Kahn told us that liberals can be shamed into conservation more easily than conservatives. From a policy perspective this is of limited use as we neither could nor should assign political preferences in the name of energy conservation. What we can do however, is provide people with real time consumption data. That fancy PG&E smart meter in the back of my home should be unlocked so I can have an app on my phone tell me in real time how much electricity and gas my house is using. The cost of that app would be lower than the $40 in home display and have a payback period of weeks or months rather than the 7 years of the display.
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.