Environmental Pricing in Regulated Energy Markets

We develop analytical models to investigate the economic behavior of consumers and firms, and apply them to conduct welfare analyses of environmental pricing schemes. We find that consumers tend to exert less effort than what firms aim to induce, with the social optimum located between them. In addition, the socially optimal choice for consumers is to participate when they face low or negative uncertainty, or high uncertainty with a significant environmental value of the saved energy, while non-participation is the socially optimal choice when they face high uncertainty with a low environmental value of the saved energy. To complement our theoretical results, we estimate the welfare loss resulting from consumers' overpaid effort. Our empirical analysis further demonstrates that participation occurs when consumers face low uncertainty, leading to increased utility, and that continuous participation by consumers plays a vital role in reducing energy consumption. However, we caution that continuous participation may not be sustainable in the long run, resulting in substantial welfare loss