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gap. For example, if agents are imperfectly informed and the government has an
inexpensive information disclosure technology, this is the approach to be used.
When the
rst best policy is not feasible, the use of second best policies, such as
energy ef
ciency standards, should be promoted. Even more, sometimes a com-
bination of instruments may be the optimal policy. This is the result obtained by
Tsvetanov and Segerson [ 28 ] using a behavioral economic approach to analyze the
role of energy ef
ciency standards. They conclude that in the presence of temp-
tation a policy combining standards with a Pigovian tax can yield higher welfare
than a Pigovian tax alone. This means that both instruments should be viewed as
complements rather than substitutes.
Using data for the US, and in the presence of misperceptions over energy savings,
Parry et al. [ 25 ] show that combining carbon pricing with gasoline/electricity taxes is
better than combining with energy ef
ciency standards.
2.4 Market Failures
One of the main contributions of economics in the analysis of energy policies has to
do with the concept of
. Energy markets often fail in obtaining
efcient results and this is due to the fact that many of the products generated by the
energy sector are products, that when used as productive or consumption inputs,
generate multiple external effects. In the presence of these negative external effects,
private costs are lower than social costs and, as long as this is not taken into account
by the markets, it is a source of inef
market failure
ciencies.
One of the main externalities is the effect derived from the use of fossil fuels and
their impact on environmental quality. Climate change is one consequence of this
massive use of fossil fuels. Unfortunately, the question about what to do and how to
achieve a situation in which there are incentives that work in the direction of using
alternative energy sources is full of dif
culties not only at the conceptual but also at
the practical level.
Environmental effects are not the only effects that have to be taken into account
when designing an appropriate regulation. There are distortions that in
uence the
energy sector, some of which are related to questions analyzed in the Principal-
Agent literature. 2 This literature, devoted to the analysis of asymmetric information
and the problems that it originates, addresses the question of what happens when
the Principal (the one that takes economics decisions) does not have all the infor-
mation that is available to the Agent (the other party) that has to ful
ll the contract
signed with the Principal. A detailed analysis to quantify the energy ef
ciency gap
due to Principal-Agent problems can be found in IEA [ 13 ].
Another important reason for market failures is the existence of transaction costs.
Coase [ 6 ] was the
rst economist to analyze the interrelation among the neoclassical
2
See Laffont and Martimort [ 18 ] for a survey of this literature.
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