Classwork 9
Information and Behavioral Anomalies
Scenario
A rental building from the 1980s has an outdated heating system.
- The landlord decides on the heating system but tenants pay the energy bills.
- Most tenants are unaware of efficiency ratings or lifetime energy costs.
- There is no submetering β heating costs are averaged into rent.
Part 1 β Identify the Market Failure
Task: Identify two market failures (excluding behavioral anomalies) present in this situation and briefly justify.
- Market Failure 1: ___________________________________________
\(\qquad\) β Because ___________________________________________________
- Market Failure 2: ___________________________________________
\(\qquad\) β Because ___________________________________________________
Show answer
| Likely Market Failure | Justification |
|---|---|
| PrincipalβAgent Problem / Split Incentive | Decision-maker (landlord) does not bear energy cost, so underinvests in efficiency. |
| Information Asymmetry / Imperfect Information | Tenants cannot observe true efficiency or operating cost difference. |
| Externality | Landlordβs decision imposes external costs (higher energy use/emissions) on tenants and society. |
Part 2 β Behavioral Lens
Task: Identify which behavioral anomaly (bounded rationality, bounded willpower, or bounded self-interest) may prevent efficient upgrades.
- Behavioral factor: __________________________________________
\(\qquad\) β Manifestation in this case: ________________________________
Show answer
| Behavioral Category | Description |
|---|---|
| Bounded Rationality | Tenants do not process long-term efficiency info (lifecycle cost). |
| Present Bias (Bounded Willpower) | Tenants/owners overweight upfront cost relative to future savings. |
| Status Quo Bias | βOld system works fineβ β default persistence. |
| Social Norms | No visible norm or peer pressure to retrofit β low adoption. |
Part 3 β Policy Design Using the Four Pillars
Fill one policy instrument or solution under each pillar that could address this situation.
| Policy Pillar | Your Proposed Solution |
|---|---|
| π° Incentives | _________________________________ |
| π§ Information | _________________________________ |
| π Institutions | _________________________________ |
| π€ Social Norms | _________________________________ |
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| Pillar | Example Policy Response |
|---|---|
| π° Incentives | On-bill financing, retrofit subsidies, carbon/energy price |
| π§ Information | Energy performance certificates, lifecycle cost labels, public audits |
| π Institutions | Mandatory energy disclosure, mandatory efficiency requirements, green lease clauses, submetering regulation |
| π€ Social Norms | Publishing building energy ratings, neighborhood retrofit challenges, public recognition campaigns |
Part 4 β Reflection Question
Why might information campaigns alone be insufficient to fix this problem?
Write a brief explanation (2β3 sentences).
Show answer
- Information does not resolve the split incentive problem β even if tenants know how much energy they could save, the landlord still has no financial reason to invest in efficiency.
- Behavioral barriers such as present bias, inattention, and status quo bias mean that people often fail to act on information even when benefits are clear.
- Behavioral barriers such as present bias, inattention, and status quo bias mean that people often fail to act on information even when benefits are clear.
- Solving the issue may require changing institutional or contractual arrangements (e.g., aligning costs and benefits, sub-metering, incentive programs), not just providing facts.