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EMF WP 13.2: Back to Basics: Searching for Principles to Guide the Energy Conservation Policy Debate

The debate over energy conservation policy is presently active, but often muddled by inconsistent references to the theoretical justifications for and against policy intervention in markets. Terms such as failure, friction, barrier and imperfection are used frequently with respect to the markets for energy and energy conservation technologies in this debate, but clear distinctions among these terms are rarely made. In contrast, economic theory points out important differences among the forces these terms reference, and finds that only a small but important subset of these forces justifies market intervention. This paper describes the distinction between market failures and other types of market imperfections which economic theory makes, and explains why policy intervention is considered justified when market failures are so defined as present. The relevance of these general distinctions to the energy conservation debate is then addressed. A few important market failures in the energy market are identified, while many of the commonly cite grounds for policy intervention are found to fail to meet the appropriate criteria.