The welfare loss associated with ignoring heterogeneous preferences

Via Regulators are people too by Tyler Cowen.

In Behavioral Public Choice: The Behavioral Paradox of Government Policy, Gayer and Viscusi analyze several recent regulations, finding that many government actions are in fact also subject to bias. Regulatory agencies have recently relied upon behavioral economics, a relatively new economics field, which identifies cognitive limitations and psychological biases that lead people to make choices that cause self-harm, thus suggesting a justification for government intervention. However, Gayer and Viscusi develop an framework of “behavioral public choice” that recognizes that government officials are also subject to behavioral anomalies and to public choice incentives that can further lead to welfare-reducing or harmful policies. They document several government policies that institutionalize rather than overcome behavioral biases, as well as regulations that justify inefficient mandates “based on weak or nonexistent evidence of consumer irrationality.”

For example, the Environmental Protection Agency, the Department of Energy, and the Department of Transportation have recently justified mandating energy-efficiency standards for durable goods (cars, appliances, etc.) based on the assumption that consumers (irrationally) do not take into account future cost savings from buying an energy-efficient product. Yet the agencies offer little or credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products. The authors note that this approach to justify regulations based on weak evidence of consumer irrationality “illustrates a key negative consequence of misusing behavioral findings: the welfare loss associated with ignoring heterogeneous preferences.”