ENERGY UTILITIES, CONSERVATION, AND ECONOMIC EFFICIENCY

Academic and policy debate has centered around an apparent "underinvestment in conservation." This paper outlines traditional explanations for underinvestment and presents a prospect theory analysis of individual conservation behavior. On the basis of investment criteria, individuals seem to discriminate against conservation investments. While these decisions might appear rational as life style decisions, individual choice across different household appliances shows little consistency. For policymaking purposes, understanding and modeling actual behavior is crucial to maximizing social welfare. The insight of certain positive models of human behavior supports economic efficiency arguments for marketplace intervention. This paper argues that because individuals making conservation investment decisions apparently do not act according to the dictates of utilitarian economics, utility sponsored conservation programs are justified on economic efficiency grounds. Finally, in light of prospect theory considerations, the paper suggests marketing guidelines for conservation investments sponsored by electric utilities.