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How Disagreement About Social Costs Leads to Inefficient Energy-Productivity Investment
- Voß, Achim
- Environmental and resource economics 2015 v.60 no.4 pp. 521-548
- energy, energy costs, social benefit
- Public energy-productivity investment influences the amount of future energy consumption. If a present government expects its successor to value the social costs of fuel usage differently, this adds a strategic component to its investment considerations. We analyze this governmental time-inconsistency situation as a sequential game. In particular, we show how the expectation of a more conservative party taking over makes a “green” government choose an investment level that is inefficient, in that neither of the parties would prefer it to the investment level of a permanent green government. Under some circumstances, the opposition would even prefer the government definitely to stay in power: The gain from avoiding a strategic investment then outweighs the loss of not being able to regulate energy consumption. We also analyze the welfare gains from binding agreements.