Question

Assume that engineers at a national research laboratory built a prototype automobile that could be driven 50 miles on a single gallon of water as fuel. They estimate that in mass production the car would cost $100,000 per unit to build. The engineers argue that Congress should force U.S. automakers to build this energy-efficient car. In your opinion, is energy efficiency the same thing as economic efficiency? Please explain your opinion and state whether you support it or not.

Please answer question in one paragraph.

Answer 1

Over recent decades, the "Energy efficiency" has come to be a buzzword in the policy debates. There is also a common conception that the energy efficiency should be the larger consideration, whatever policy initiatives are taken. But the problem involved in it is that the strict argument for saving energy even at the sacrifice of overall economic efficiency. That argument is without considering that saving energy will also require the wasteful use of other resources. Energy efficiency focus on the relationship between one input into the production process, energy, relative to the output generated by that process. This simplistic view makes no consideration for the strong possibility that other inputs such as labour, plastic, steal, copper, glass, etc. might actually increase. Economic efficiency, on the other hand, relates total costs to the value of the output that those costs generate. From an economics perspective, the term costs here does not simply refer to monetary outlays, but any sacrifice that the business or consumer must make to obtain a given benefit — that would include sacrifices in time or convenience, which are subjective and valued differently by different people. For this reason, economists generally argue that outside observers (such as energy efficiency experts, politicians, and bureaucrats) cannot decide what is an efficiency-enhancing decision for others. When experts and policy advocates push energy taxes, incentives, and mandates to promote energy efficiency, they are doing what Nobel Prize-winning economist F.A. Hayek warned against: crafting public policy through a “pretence of knowledge.” The government pretend to have information about other people’s preferences and alternative uses of resource that they could not possibly obtain. For an increase in energy efficiency to translate into an increase in economic efficiency, it would have to result in an overall decrease in the average cost of production or, if you are a consumer, the cost of consumption. The people implementing the energy efficiency plan would have to be better off from their own perspectives. Thus the cost of production in the above example is very huge, which is economically inefficient for the producers and consumers. Hence the mechanism for producing that car using water as fuel cannot be recommended from an economic perspective. The government can use economically better off strategies like giving incentives for using other energy resources and promoting new cost-efficient technologies without harming the environment as much as what now does.