Consumers of energy-using technologies cannot make good decisions regarding which technologies to employ unless they possess the appropriate information. The need for information creates three potential types of market failures with respect to energy-using technologies (Jaffe and Stavins, 1994).
Information as a Public Good
Generic information regarding the availability of different kinds of technologies and their performance characteristics may have the attributes of a public good, and hence may be underprovided by the private market. This relates both to information that consumers need to acquire about specific technologies, as well as to information that manufacturers need to acquire regarding the attributes and needs of consumers. This problem is exacerbated by the fact that even after a technology is in place and being used, it is often difficult to quantify the energy savings that resulted from its installation, since usage patterns and outside influences such as weather may have changed. Knowing that this uncertainty will prevail can itself inhibit technology diffusion, as internal or external advocates for a new technology may doubt that they will be able to justify investment decisions after the fact. Firms supplying products or services within a particular market learn from one another with respect to understanding the market and operating effectively in it. The processes and networks by which this learning takes place, such as professional associations, conferences, publications, and informal networks are often weak in developing countries and EITs.
One of the mechanisms for the transmission of both generic information and application-specific information may be the process of technology adoption itself. That is, one way that a user learns about a new technology is by seeing it used or communicating with other agents that have used it. In this case, the adoption of the new technology by a given user creates a positive information externality, by lowering the cost for others to acquire useful information. This implies that the act of adoption has social benefits that exceed its private benefits, and hence will be inadequately undertaken by private agents.
Misplaced or Split Incentives
The third form of informational barrier arises in an institutional context in which investment decisions regarding energy technology must be made in an environment of agency, that is, one economic agent must make an investment decision that affects the energy costs of some other agent. Examples include contractors who build for others, and tenant-landlord situations where investments are made by the landlord that reduce a tenants energy costs (or vice versa). In these situations, the party making the investment can recover that investment from the party paying the energy costs only if the investor can credibly convince the consumer that the energy savings justify the investment. That may not happen, however, because information is costly to convey credibly.
The limitations that inadequate information places on decision-making depend on the context. Institutions play an important role both in transmitting information, and in determining the extent to which incentives exist to share and act on information. There is therefore a close relationship between informational and institutional barriers, as evidenced by the discussion of misplaced incentives in the previous paragraph and previous subsection. Finally, in many situations it is difficult to determine the extent to which apparently efficient decisions are limited by inadequate information, or whether instead the information is available but decision makers bounded rationality limits their ability to utilize information effectively.
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