Question

Suppose that in an attempt to induce citizens to conserve energy, the government enacts regulations requiring all air conditioners to be more efficient in their use of electricity. After the regulation was implemented, government officials were surprised to discover that people were using even more electricity than before. How is this possible?

(A) Because the regulation effectively reduced the price of cool air, consumers with sufficiently elastic demand might have bought substantially more of it.

(B) There is no way the observed change could have occurred if all consumers were fully informed, self-interested, and rational.

(C) The government ignored the possibility that the demand curve for electricity might be upward sloping.

(D) In practice, people often pay little attention to the relevant costs and benefits when deciding how much of a good, like electricity, to use.

Answer 1

The increase in electricity usage despite more efficient air conditioners can be attributed to elastic demand for cool air, which caused consumers to increase consumption more than the effectiveness of the conservation measure.

Step-by-step explanation:

The observation that people were using more electricity even after the government required air conditioners to be more efficient could be explained by option (A). This is because the regulation effectively reduced the price of cool air. If consumers have sufficiently elastic demand for cool air, they may react to the lower effective price by increasing their consumption by a larger proportion, thereby using more electricity overall.

When demand is elastic, consumers respond to a decrease in price with a proportionally larger increase in quantity demanded. This phenomenon can be seen in other instances where technological improvements or regulations make a product more efficient, potentially leading to a decrease in its usage cost. As explained in the elasticity chapter, consumers may respond to this decrease by consuming more of the good.

The surprise increase in electricity consumption after the regulation of air conditioners can be compared to events in the winter months of 2005 when natural gas and electricity prices soared. Although some people responded by conserving energy, in cases where demand is inelastic, such as with home heating, people might still end up spending more overall due to the insufficient reduction in consumption relative to the price increase.

Answer 2

(A) Because the regulation effectively reduced the price of cool air, consumers with sufficiently elastic demand might have bought substantially more of it.

Step-by-step explanation:

If the demand for energy services remains constant, improving energy efficiency will reduce energy consumption and carbon emissions. However, many efficiency improvements do not reduce energy consumption by the amount provided by simple engineering models. This is because they make energy services cheaper and therefore increases the consumption of those services.

For example, since low-fuel vehicles make travel cheaper, consumers can choose to drive further, thus offsetting some of the possible energy savings. Similarly, an extensive historical analysis of improvements in technological efficiency has conclusively demonstrated that improvements in energy efficiency were almost always overcome by economic growth, which resulted in a net increase in resource use and associated contamination.