Dino-gizmo’s. Only a few tree-huggers and lab coats will buy the Eco-
Gizmo, and Eco-Gizmo Inc. will go out of business.
Perhaps government interventions are necessary to oil the transition
and give innovation a chance. Support for research and development? Tax-
incentives favouring the new product (like the tax-incentives that oiled the
transition from leaded to unleaded petrol)?
Imagine that Eco-Gizmo Inc. makes it from tadpole to frog, and that carbon
taxes are sufficiently high that an Eco-gizmo indeed costs 5% less than
its long-standing high-carbon rival from Dino-appliances, Inc. Surely the
carbon taxes will now do their job, and all consumers will buy the low-
carbon gizmo? Ha! First, many consumers don’t care too much about a 5%
price difference. Image is everything. Second, if they feel at all threatened
by the Eco-gizmo, Dino-appliances, Inc. will relaunch their Dino-gizmo,
emphasizing that it’s more patriotic, announcing that it’s now available in
green, and showing cool people sticking with the old faithful Dino-gizmo.
“Real men buy Dino-gizmos.” If this doesn’t work, Dino will issue press-
releases saying scientists haven’t ruled out the possibility that long-term
use of the Eco-gizmo might cause cancer, highlighting the case of an old
lady who was tripped up by an Eco-gizmo, or suggesting that Eco-gizmos
harm the lesser spotted fruit bat. Fear, Uncertainty, Doubt. As a backup
plan, Dino-appliances could always buy up the Eco-gizmo company.
The winning product will have nothing to do with energy saving if the
economic incentive to the consumer is only 5%.
How to fix this problem? Perhaps government should simply ban the
sales of the Dino-gizmo (just as it banned sales of leaded-petrol cars)?
Imagine that Larry the landlord rents out a flat to Tina the tenant. Larry is
responsible for maintaining the flat and providing the appliances in it, and
Tina pays the monthly heating and electricity bills. Here’s the problem:
Larry feels no incentive to invest in modifications to the flat that would
reduce Tina’s bills. He could install more-efficient lightbulbs, and plug in
a more economical fridge; these eco-friendly appliances would easily pay
back their extra up-front cost over their long life; but it’s Tina who would
benefit, not Larry. Similarly, Larry feels little incentive to improve the flat’s
insulation or install double-glazing, especially when he takes into account
the risk that Tina’s boyfriend Wayne might smash one of the windows
when drunk. In principle, in a perfect market, Larry and Tina would
both make the “right” decisions: Larry would install all the energy-saving
features, and would charge Tina a slightly higher monthly rent; Tina would
recognize that the modern and well-appointed flat would be cheaper to live