most. Such behavior is usually attributed to short-term energy price fluctuations, to time lags in adjustment, to the unavailability of complete information to guide decisions, or to impediments to market functioning, such as the presence of price controls on energy, the existence of regulated utilities, and the prevalence of situations such as rental housing, where purchasers of efficient energy-using equipment do not benefit from the investment.1 It follows from this argument that government action can make the energy system more efficient by removing impediments to market functioning, providing information, or offering incentives or penalties through tax policy, assistance programs, or through regulation. Such policies can shorten the time it takes for energy users to take actions that most benefit them.

Despite some evident differences in energy policy among recent federal administrations, all have operated on the underlying assumption that when individuals or organizations use energy, they are making rational economic decisions aimed at maximizing some objective function. In the Ford and Carter administrations, this view provided the rationale for programs to inform citizens of the energy costs of major purchase decisions. It lay behind the Carter administration’s tax incentives to speed conversion to energy-efficient operation of homes and businesses and it helped justify the removal of oil price controls by the Carter and Reagan administrations. Such diverse governmental actions as low-income weatherization assistance, small “appropriate technology” grants, energy performance stanfor buildings, and even the elimination of these same programs have all been justified in terms of the assumption that energy users make economically rational decisions.

While it may seem strange that the same basic assumption has been used to support opposing policies, the assumption remains useful for predicting and interpreting aggregate changes in energy use, and it has practical implications for policy. For example, the simple assumption of rationality correctly predicts that when oil prices rise relative to the prices of other fuels and of energy-efficient equipment, some energy users will switch from oil to other fuels, and some will invest in energy-efficient equipment. To cut oil use, then, the assumption of rationality suggests raising oil prices, and data from the United States and other industrialized nations show that this policy is effective (e.g., Marlay, 1982; Schipper and Ketoff, 1982).

Careful observation of individuals and organizations provides support for the importance of simple cost and return factors in the behavior of energy users. However, careful observation also makes it clear that other factors are involved. For example, in Chapter 3, we described how energy users may lack the knowledge to take advantage of information conveyed in energy prices and how they fail to act on information they distrust.

There is other evidence that a variety of social, political, economic, and



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