Negative Dividends: Internality Losses can Outweigh Externality Gains

The Energy Star certification program highlights energy efficient goods with a label. Given that it could either focus attention on the energy consumption of alternatives or provide a license to ignore the attribute, it follows that recent research highlights heterogeneity in consumers’ responses to the label. This paper answers two questions implied by this heterogeneity. First, do individuals with particular characteristics respond to Energy Star certification in systematically different ways? Second, what do these differences imply about the value of the Energy Star to consumers? We present results from a stated choice experiment intended to answer these questions. Assuming an underlying random utility model and applying a mixed logit approach, we estimate utility parameters conditional on an individual’s sequence of choices. Our results show that differences in consumers’ responses to the Energy Star label are associated with individual characteristics. Moreover, the heterogeneity in responses implies that, though the Energy Star program lowers expected external costs associated with energy consumption, it could impose much greater internality costs on consumers. The Energy Star label may not be an appropriate non-pecuniary measure to increase consumers’ attention to the energy consumption attribute of alternative goods, at least in the context of light bulb choice considered here.