Another possible non-market-failure explanation for the energy efficiency gap is associated with the fact that even if a given technology is cost-effective on average, it will mostly likely not be for some individuals or firms.
If the relevant population is heterogeneous—with respect to variables such as the purchaser’s discount rate, the investment lifetime, the price of energy, the purchase price, and other costs— even an electricity technology that looks very good for the average user will be unattractive for a portion of the population. Heterogeneity in these and other factors leads to differences in the expected value that individual purchasers will attach to more energy-efficient products. As a result, only purchasers for whom it is especially valuable may purchase a product.
Depending on how the efficiency gap is measured, such underlying heterogeneity can provide yet another non-market-failure explanation. For example, it may not make sense for someone who will only rarely use an air conditioner to spend significantly more purchasing an energy-efficient model—they simply may not have adequate opportunity to recoup their investment through energy savings.
Analysis based on single estimates for the important factors previously discussed—unless they are all very conservative—will inevitably lead to an optimal level of energy efficiency that is too high for some portion of purchasers. The size of this group, and the magnitude of the resulting inefficiency should they be constrained to choose products that are not right for them, will of course depend on the extent of heterogeneity in the population and the assumptions made by the analyst.
