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Incentivizing Energy Efficiency under Private Information: The Social Optimum

This paper addresses how far public initiatives should try to eliminate the energy efficiency gap if consumers hold private information about their willingness to pay for efficiency. The major finding is that even socially optimal efficiency programs should only close a fraction of the gap. This conclusion has to be strengthened if the external costs of energy were internalized, because an intervention is then only justified for low costs of public funds and very large payback gaps. Furthermore, the realistic assumption of private information implies that the highest subsidies must be paid to efficient types, which turns incentives based on perfect information upside down.

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Keywords: Energy efficiency gap, Payback gap, Private information, Principal-agent model, Mechanism including aggregate performance

DOI: 10.5547/01956574.40.6.fwir

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Published in Volume 40, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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