Heterogeneous (Mis)Perceptions of Energy Costs : Implications for Measurement and Policy Design

Quantifying heterogeneity in consumers' misperceptions of product costs is crucial for policy design. We illustrate this point in the context of energy-using durables, where a long-standing policy debate continues on whether taxes or efficiency standards are superior for regulating externalities. We estimate heterogeneous perceptions of energy costs and demonstrate standards outperform taxes for a wide range of compliance costs. Standards reduce variance in energy operating costs relative to taxes, which ameliorates distortionary effects from misperceptions. Further, we find correctly characterizing misperception heterogeneity is less important for setting optimal standards than for taxes