FEEM working papers "Note di lavoro" series
2015 .033

Energy Efficiency Policy with Price-quality Discrimination


Authors: Marie-Laure Nauleau, Louis-Gaëtan Giraudet, Philippe Quirion
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Energy Efficiency, Price-Quality Discrimination
JEL n.: Q4, Q41, Q48
JEL: Energy Economics
Pages: Vol. 52, Supplement 1, Pages S53–S62
Date: 12/2015

Abstract

We compare a range of energy efficiency policies in a durable good market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that the social optimum can be achieved with differentiated subsidies. With ad valorem subsidies, the subsidization of the high-end good leads the monopolist to cut the quality of the low-end good. The rates should always be decreasing in energy efficiency. With per-quality subsidies, there is no such interference and the rates can be increasing if the externality is large enough relative to the market share of low-type consumers. Stand-alone instruments only achieve second-best outcomes. A minimum quality standard may be set at the high-end of the product line if consumers are not too dissimilar, otherwise it should only target the low-end good. An energy tax should be set above the marginal external cost. Likewise, a uniform ad valorem subsidy should be set above the subsidy that would be needed to specifically internalize energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivized, a per-quality schedule should be preferred over an ad valorem one. An ad valorem tax on the high-end good may even be preferred over an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.

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Suggested citation: Nauleau, M-L., L-G. Giraudet, P. Quirion, (2015), 'Energy Efficiency Policy with Price-quality Discrimination', Energy Economics, Volume 52, Supplement 1, December 2015, Pages S53–S62

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