EC330 AT W10: Behavioural Environmental Economics

What is the traditional foundation of models of behaviour in environmental economics?

Based on the standard neoclassical framework, assumes rational choice theory where individuals make consistent and systematic decisions

How do behavioural biases affect thinking about environmental policy?

• Behavioural biases can cause individuals to deviate from rational, systematic decision-making.

• Policies based only on market failures may be less effective if they ignore behavioural failures.

• Raises the question of whether regulation should be adjusted to account for behavioural biases (environmental-behavioural second-best problem).

Can social norms influence environmental outcomes?

Yes.

Social norm interventions nudge people towards conservation by highlighting what others are doing.

A major example:

• Home Energy Reports (OPOWER program):

  • Mailed to households.

  • Show energy usage compared to similar neighbors.

  • Include conservation tips and sometimes smiley faces for good behavior.

  • Impact:

    • Encouraged households to reduce energy consumption.

    • Average energy use fell by around 2%.

    • Extremely cost-effective compared to traditional energy efficiency programs.

What is the difference between descriptive vs injunctive norm?

Descriptive norm

• what people typically do

• example: most people recycle their bottles

Injunctive norms

• what people approve or disapprove of

• Example: "People believe you should recycle your bottles."

What did the littering experiment by Cialdini (2003) show about descriptive and injunctive norms?

• Descriptive norms (what people do) heavily influence behavior.

• More littering when the environment is already dirty and someone drops trash.

• Less littering when environment is clean, especially if someone violates the norm (drops trash).

• Shows that when descriptive norms conflict with injunctive norms, descriptive norms can dominate.

When descriptive norms and injunctive norms conflict, what happens?

people often follow what others are doing, not what they should be doing.

• undermines pro-environmental behaviour

  • make people behave worse for the environment, even though they know better

How does publicly disclosed information affect environmental behaviour?

Publicly visible conservation boosts environmental behaviour through status, reputation and signalling effects

Example

UCLA Residence Halls (Delmas & Lessem 2014):

• Giving private feedback about energy use had little effect.

• But making public conservation ratings visible to others reduced electricity consumption by 20%.

What are two reasons consumers might make mistakes in environmental behaviors?

1. Complex pricing

   • nonlinear electricity pricing with confusing pricing structures

2. Inattention to energy costs

   • ignore energy savings when buying products

What is nonlinear pricing and where is it commonly used?

Nonlinear pricing refers to the different marginal prices depending on how much you consume

• common in income taxes, phone bills and utilities like electricity

What does Ito (2014) find about how consumers respond to nonlinear electricity pricing?

consumers mostly respond to average price, NOT the marginal price

Evidence:

1. no bunching at price kinks (where marginal price jumps up)

2. average price has a string effect on electricity usage

3. consumers’ perceived price looks almost exactly like their average price

Why do utilities use nonlinear pricing?

To encourage conservation

• charge a higher marginal price (MP) for high electricity use to deter overconsumption

• But they must also maintain zero profit (no losses)

  • need to lower MP for some to raise MP for others

    • Some customers are charged lower marginal prices for lower consumption.

    • effect on aggregate consumption is ambiguous

Ito paper suggests that consumers respond strongly to average price instead of marginal price. Why?

Marginal prices are complex and hard to understand

• easier cognitively for people to just think about “how much my total bill will be”, not “how much the next unit costs”

• This cognitive simplicity leads to a focus on total costs, which can encourage less than optimal consumption decisions.

What are the welfare implications of Ito (2014)’s findings?

• If consumers respond to average price (flat pricing), the pricing structure could increase total consumption

• If consumers respond to marginal price (MP), higher prices for heavy use would reduce overall consumption

• Nonlinear pricing fails to achieve conservation goals.

  • Leads to inefficient outcomes and misses intended environmental benefits.

What is loss aversion?

People feel losses more strongly than equivalent gains

Examples of loss aversion

• Taxes (like a bag fee for disposable bags) feel like a loss and have a stronger behavioral impact.

• Bonuses (like a discount for using a reusable mug) feel like a small gain and don't motivate as much.

What are other explanations for tax having a stronger effect than bonus other than loss aversion?

1. Difference in awareness:

   • People might have been more aware of the tax policy than the bonus offer.

2. Social norms shifting:

   • A tax might change social norms more strongly than a bonus.

   • Paying a tax makes people feel social pressure not to use disposable bags.

3. Asymmetric incentives:

   • For people who already use no bag, a bonus does nothing extra.

   • A tax penalizes every disposable bag use, giving stronger motivation.

4. Product differences:

   • Disposable bags might be small and easy to forget about, making bonuses less effective.

   • Taxes highlight the use of each bag.

5. Cashier behavior:

   • After a tax is implemented, cashiers might behave differently (e.g., asking "Do you want to pay for a bag?"), nudging customers even more.

6. General tax aversion:

   • People dislike paying taxes more than they like getting small bonuses — pure psychology.

Key takeaway from loss aversion

If you want to change behavior for the environment, it's more effective to frame interventions as a loss (e.g., taxes) rather than a gain (e.g., bonuses).