Erica Myers (10/24/18)

Erica Myers

University of Illinois at Urbana-Champaign

“Heterogeneous Misperceptions of Energy Costs: Implications for Measurement and Policy Design”

Abstract: How consumers perceive different aspects of product cost, such as sales tax, shipping and handling charges, and energy operating expenses among others, have important welfare implications for policy.  In this paper, we estimate heterogeneous perceptions of energy costs in the U.S. appliance market using a revealed preference approach. We recover a non-parametric distribution and  show that while the largest share of consumers correctly perceives energy costs, a significant share undervalues them, and smaller shares either significantly overvalues or does not pay attention to them. These patterns are strikingly similar across income groups. We simulate the welfare effects of policies targeting externalities in the presence of heterogeneous misperceptions and show that standards largely outperform taxes. Standards’ key advantage is that they reduce variance in energy operating, which ameliorates the distortionary effects from potential misperceptions. Full Paper