Economics of Energy Efficiency

externality An economically significant effect of an activity, the consequences of which are borne (at least in part) by parties other than the party who engages in the activity, and which are not accounted for through trade. diffusion The gradual adoption of new process or product innovations by firms and individuals. innovation The initial market introduction or commercialization of new process or product inventions. invention The development and creation of a prototype new idea, process, or piece of equipment. market barriers Disincentives to the diffusion and/or use of a good, such as high costs or prices, which may or may not represent market failures. market failures The failure of private markets to provide certain goods at all or at the most desirable level, typically arising from a situation in which multiple parties benefit from a good without decreasing one another’s benefits, and in which those who have paid for the good cannot prevent others from benefiting from it. technological change The process of invention, innovation, and diffusion whereby greater and/or higher quality outputs can be produced using fewer inputs. This article reviews economic concepts relevant to decision making about energy efficiency investments and related policy choices. We describe economic perspectives on the process of energy-saving technological change, the distinction between market failures and market barriers in energy-using product markets, and the important role that discounting plays in this area.