Econ

Defining Free Ridership as it pertains to the public benefit of energy efficiency

What is the true definition of a "Free Rider"? In the economic way of thinking, Free Riders are individuals who benefit from good consumption without having to pay for or produce said good. Although the definition itself seems somewhat appalling, due to lack of incentives to pay, at some point in their lives everyone has been guilty of succumbing to free ridership's temptation. This economic issue is often understated and can be quite maddening to policy makers and economists. Unfortunately, the term and its affect on policy programs is a debatable topic. Most believe it is irrational to give incentive to any program that attracts free ridership and others simply believe that the problem will just go away by natural occurrence; that the opposing side of spillover benefits offsets it. So, how do we take into account free ridership's negative affect? How would we assess the general public's actions if there were no laws or incentive to recycle or to give charitable contributions? We must assume that an Individual's decision making process is guided mostly by his/her own costs and he/she will ultimately gravitate to choose what best fits his/her own interest rather than considering society as a whole. In the article, Energy Efficiency and the Spectre of Free-Ridership, Stephen Heins is attempting to uncover the best measure practice in evaluating energy efficiency and sustainability programs of utilities in spite of the preconceived (and perhaps overstated) notion Free Ridership as it pertains to public benefits. Here, Heins opines that in the spectrum of energy efficiency programs, the term "Free Rider" actually means something very different, to the point where takes on its own unique definition. Contrarily, the author defines free ridership as "someone who would install an energy-efficiency measure without any program incentives because of the return on investment of the measure, but receives a financial incentive or rebate anyway." The author believes the threat of what we traditionally understand as free ridership, through regulation, has affected the ability to properly implement or even gauge the impact of energyefficiency programs. He sees Free Ridership as a scapegoat, only used when appropriate to policy makers. In effect, Heins is saying that the system corruptly abuses this term and a result such programs have been historically relegated as simple social welfare programs and nothing more. I tend to disagree.

The effect of free ridership does in fact encourage inefficient use of consumption and would drastically overestimate a program's energy savings. The greater the incentive to "free ride", the more a program's effectiveness declines. A program cannot be simple green-lighted in spite of this economic issue. Although we do not have to necessarily deny those seeking incentives because of the threat of free ridership, however, I do believe that it is vital for any program to include procedures that react to the conceivable effect of free ridership. Let's continue with Heins' point. The most efficient way to measure the impact of energy efficient programs, Heins projects, is by gathering the total electricity saved. Exactly how much could technology and implemented programs stem the growth of energy and the need for new power supply? He believes that we will never know until the false blame on free ridership is stopped and the negative view of such efficiency programs by electric utilities. He continues by proposing that if we focus past the empty threat of free ridership, we can better establish a proper cost-benefit analysis of building new power plants. Is it cheaper to employ a program to save energy or build a unit that creates more energy? The article addresses recent studies that suggest the implementation of such programs cost nearly a third of the total cost of a new power supply. Going back to what is maddening about free-ridership; the article offers a great example of the long term effect of complying with energy-efficiency programs: The California Energy Crisis. Through government regulation, the state was able to reduce demand by 5% in the one year and was poised to reduce overall demand by 10% in the following decade. This projection amounts to a reduction of needs equal to 12 large power plants or roughly $12 billion in net benefits. The thought of the net benefits of a similar belt tightening across the entire nation would be incredible to ponder. Consider, however, that these savings involve the participation of many individual end users and not just large companies. This discovery brings us to the notion of Positive Externalities (benefits to the non-participants) and Negative Externalities (costs to the non-participants). Heins believes that there are no such externality concerns present that would yield free ridership. Rather the overwhelming economic and social value of reducing electricity demand results in an incredible benefit of cost and emission reduction for all. So why do Administrators of these programs "encounter" so much free ridership? I'd like to answer that by simply saying it's a lack of information. A great deal of free ridership is unbeknownst to the

individual. Do I know for a fact that my electric bill has decreased because every Wal-Mart in a 10 mile radius changed to more efficient light bulbs? This highlights the importance of the government offering rebates and incentives on purchasing energy efficient appliances through the energy star program. We must make end users aware of the results