ABSTRACT
This chapter examines energy efficiency from an economic perspective and physical measures such as energy conservation and energy efficiency from an economic perspective of benefits and costs. It considers energy efficiency in production and consumption and examines the possibility of an energy efficiency gap, a potential market failure whereby consumers purchase less than the economically efficient amount of energy efficiency. The chapter then considers the rebound effect, where an increase in energy efficiency leads to greater use of energy-using technology, partially offsetting energy savings. The penultimate section revisits government options for correcting market failures if there is an energy efficiency gap or other failures specific to energy efficiency decisions. In energy efficiency and other arenas of government intervention, critics express the concern that unlike markets, the government is not playing with its own money. Negative externalities attributable to energy use are a common justification for government intervention such as subsidies to encourage the purchase of energy-efficient appliances.
