Do people cut back on energy use when prices rise or when politicians ask them to?

They cut back under both scenarios. That is the conclusion of a working paper from Peter Reiss of Stanford and Matthew White of the Wharton School at the University of Pennsylvania. The authors traced individual household electricity use in California from 1998-2001. In the first half of this period, electricity prices were relatively flat. In 2000, they doubled over a period of less than two months. After trying a price cap, lawmakers funded a $65 million public awareness campaign in 2001 urging conservation. Because Reiss and White collected monthly meter readings, and had exact time periods for price spikes and media and community outreach (plus random weather events), they are able to perform sophisticated statistical analysis of consumer reactions.

Their assessments about reactions to price rises are unequivocal.

Average household consumption fell thirteen percent over a short span of approximately sixty days, in response to an unannounced price increase. Since these results are obtained from actual (metered) energy use at the consumer level for a large representative sample of households, they leave little room to dispute the magnitude or timing of consumer behavior. The evidence here should be sufficient to dissipate any lingering views that consumers cannot
(or will not) respond quickly to energy price changes.

The assessment about the public awareness campaign is nearly as straight-forward.

The data reveal that the average household reduced its consumption significantly during the state’s public appeals for energy conservation, even though it faced no pecuniary incentive to do so. The fact that public pressure of this sort works at all raises the important question of whether prices or non-price mechanisms should be the preferred means of mediating energy consumption when a market shock requires it.

It can seem absurdly obvious to argue that people react to both financial incentives and social appeals. And yet the tendency to stress one side at the expense of the other in a political debate is often overwhelming. There is even a bit of this tendency in the last sentence above – “whether prices or non-price mechanisms should be…” But we will go on making the argument that the two are not incompatible, and suggest that policymakers think about how to design their non-price mechanisms to complement market events.

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