Low-Energy Fridays: Public vs. Private Benefits

The Biden administration is proposing updates to appliance efficiency rules that are set by the U.S. Department of Energy (DOE). The updates claim to save a homeowner $295 spread out over 14 years for a new washing machine and $130 over the life of a new refrigerator. While this sounds good, these sorts of rules are controversial because they highlight the complicated difference between public benefits and private benefits.

A well-designed regulation should capture benefits from avoided costs that would otherwise be borne by the public. Regulations on pollution are the classic example: pollution affects everyone, so rules that prevent it benefit everyone. But what about regulations that are not going to capture enough public benefit to justify the cost burden they impose? In these situations regulators can use other benefits, which include the private benefits (usually cost savings to individuals) to claim the rule is beneficial to the economy, but this type of regulatory intervention is controversial because it relies on an assumption that government can steer dollars better than consumer choice.

For appliance efficiency, regulators claim that the increased costs of appliances are outweighed by long-term savings on utility bills yielding a net long-term economic benefit. But this is largely based on hypothetical averages and may be ignoring how higher cost appliances can bring economic harm as well.

Sometimes a person may choose a product they know has more long-term cost but less near-term cost because they have other competing demands on their dollars. Those demands can be higher priority expenses, or other spending that would yield greater long-term returns such as financial investments or education. By using regulations to try to influence how consumers spend their dollars, there may be other, smarter financial opportunities that are lost.

One of the worst examples of private benefits justifying higher costs is California’s requirement for new homes to be built with solar panels. The regulators claim this will save homeowners money, but it ignores how the regulation raises the costs of housing and the harm caused to Californians who want to buy homes but cannot afford them—sticking them with rentals for even longer. Recall that these rules rely on private benefits because their costs outweigh the expected climate or environmental benefit, so it is central to regulators’ claims of justification that consumers are better off.  

At the end of it all, this is a philosophical question about the role of government. Should government be able to force consumers to capture a private benefit they think is available, even if it comes at the expense of another opportunity? Or should government intervention be restricted to capturing public benefits? Expect this question to be debated within the administration, Congress and even the courts as the DOE’s new rules get finalized.