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similar to requiring automobile companies to install airbags, which
consumers might not buy without a mandate. Since people do not al-
ways behave in their long-run self-interest, careful use of regulatory
mandates can save lives (in the case of airbags) or money and CO
2
emis-
sions (in the case of effective energy regulations).
How would we evaluate energy regulations when energy-cost myo-
pia is factored in? This turns out to be a deep question because we do
not know exactly why people exhibit energy-cost myopia. One interest-
ing approach is to assume that people “overdiscount” future energy
savings. That is, people implicitly apply a very high discount rate to fu-
ture fuel savings. In the case discussed above, overdiscounting would
reduce the long-term $4,000 savings. Suppose I apply a 20 percent an-
nual discount rate to future fuel savings. A spreadsheet analysis will
calculate a discounted gasoline savings of only $1,837, versus the extra
$2,000 of up-front cost. Applying the super-high discount rate, I would
indeed buy the gasoline-fueled car.
A fi nance specialist might tell me that I am behaving myopically. I
would be better off putting my money in the diesel car rather than in
my savings account. I respond, “Hold on before you call me myopic,
dude!” I have a long list of reasons for my behavior. I need my savings
for a rainy day; gasoline prices might go up; the bank deposit is guaran-
teed by the federal government; maybe I will wreck the car; perhaps I
won't like the car and will sell it for a steep discount in a couple of
years. So $2,000 in the bank—as opposed to in the diesel car—might
seem completely sensible. These may not be sound reasons, but they
might be suffi cient to tilt people toward investments with low up-front
costs and higher deferred costs.
In this context, let us revisit the effi ciency of different regulations
under the assumption that purchasers are myopic and overdiscount fu-
ture energy savings. This would in reality apply mainly to consumer
purchases, since businesses are more consistent in their economic deci-
sions. The team that produced the estimates in Table 12 also investi-
gated the cost of regulations when consumers use a high discount rate.
They label this scenario “complete market failures” to represent the
