Being human is a market failure

Panel: 1. Foundations of future energy policy

This is a peer-reviewed paper.

Author:
Hans Nilsson, FourFact AB, Sweden

Abstract

Traditional neo-classic economics prevents the potential of energy efficiency to be fully realised since it does not accept energy policies to be sufficiently developed. In the most orthodox learnings it is claimed that there is no need for energy policies when there are no market failures to be cured and such failures, it is said, are rare. They have to do with public goods, externalities and information to mention some.

Information failure is, it is said, a significant market failure that can occur in two basic situations. Firstly, information failure exists when some, or all, of the participants in an economic exchange do not have perfect knowledge. Secondly, information failure exists when one participant in an economic exchange knows more than the other, a situation referred to as the problem of asymmetric, or unbalanced, information.

Behavioural economics however show that information can only rarely be assumed to be understood in an unambiguous way. Even if it would be possible to create information in a format that was objectively correct it is transformed by the receiver according to experience, beliefs, tradition and even time available that distorts the information content and may deliver a less than optimal decision. Being human creates market failures in itself.

Energy efficiency being a complex good, since it can be achieved in many different ways, is in particular need for corrections of this market failure. And there are ways to handle the market by making use of knowledge from behavioural economics. The role of the economic man however has to be rewritten.