Jevons paradox

In economics, the Jevons Paradox is an observation made by William Stanley Jevons, that as technological improvements increase the efficiency with which a resource is used, total consumption of that resource tends to increase, rather than decrease. It is historically called the Jevons Paradox as it ran counter to popular intuition. However, the situation is well understood in modern economics. In addition to reducing the amount needed for a given output, improved efficiency lowers the cost of using a resource – which increases demand. Overall resource use increases or decreases depending on which effect predominates.

William Stanley Jevons

In his 1865 book The Coal Question, Jevons observed that England's consumption of coal soared after James Watt introduced his coal-fired steam engine, which greatly improved the efficiency of Thomas Newcomen's earlier design. Watt's innovations made coal a more cost effective power source, leading to the increased use of the steam engine in a wide range of industries. This in turn increased total coal consumption, even as the amount of coal required for any particular application fell. Jevons argued that increased efficiency in the use of coal would tend to increase the use of coal, and would not reduce the rate at which England's deposits of coal were being depleted.

Explanation

Elastic Demand: Jevons Paradox occurs

Inelastic Demand: Jevons Paradox does not occur

One way to understand the Jevons Paradox is to observe that an increase in the efficiency with which a resource (e.g., fuel) is used causes a decrease in the price of that resource when measured in terms of what it can achieve (e.g., work). Generally speaking, a decrease in price of a good or service will increase the quantity demanded (see supply and demand, price elasticity of demand). Thus with a lower price for work, more work will be "purchased". This leads in turn to more demand for fuel (known as the rebound effect). This increase in demand may or may not be large enough to offset the original drop in demand from the efficiency gain.

Consider the simplest case; a perfectly competitive market where fuel is the sole input used, and the only determinant of the price of work. If the cost of fuel remains constant, but the efficiency of its conversion into work is doubled, the effective price of work is halved and so twice as much work can be purchased for the same amount of money. If the amount of work purchased more than doubles (i.e. the price elasticity of work is relatively elastic), then the quantity of fuel used would actually increase, not decrease. If however, the price elasticity of demand for work is relatively inelastic, the amount of work purchased would less than double, and the quantity of fuel used would decrease.

A full analysis would also have to take into account the fact that products (work) use more than one type of input (e.g. fuel, labor, machinery), and that other factors besides input cost (e.g. a non-competitive market structure) may also affect the price of work. These factors would tend to decrease the effect of fuel efficiency on the price of work, and hence reduce any increase in the quantity of work demanded, making Jevons Paradox less likely to occur. Additionally, any change in the quantity demanded for fuel would also have an effect on the price of fuel, and therefore also on the effective price of work.

Khazzoom-Brookes postulate

Main article: Khazzoom-Brookes postulate

In the 1980s, the Jevons paradox was revisited by the economists Daniel Khazzoom and Leonard Brookes in terms of the overall energy use of a society. They argued that increased energy efficiency paradoxically leads to increased overall energy consumption. In 1992, the US economist Harry Saunders dubbed this hypothesis the Khazzoom-Brookes Postulate, and showed that it was true under neo-classical growth theory over a wide range of assumptions.

Increased energy efficiency tends to increase energy consumption by two means. Firstly, increased energy efficiency makes the use of energy relatively cheaper, thus encouraging increased use. Secondly, increased energy efficiency leads to increased economic growth, which pulls up energy use in the whole economy.

At the microeconomic level improvements in energy efficiency often result in reduced energy consumption, though there is a rebound effect that increases energy demand. However, at the macroeconomic level improved energy efficiency leads to more economic growth that in turn increases energy use throughout the economy. Taking into account both effects, technological progress that improves energy efficiency, will by lowering the implicit cost of energy, tend to increase overall energy use.

Energy conservation policy

In The Coal Question, Jevons argued that improvements in fuel efficiency does not reduce the use fuel. "It is a confusion of ideas to suppose that economical use of fuel is equivalent to diminished consumption. The very contrary is the truth."

This does not imply that increased fuel efficiency is worthless. Increased fuel efficiency enables greater production and a higher quality of life. For example, a more efficient steam engine allowed the cheaper transport of goods and people that contributed to the Industrial Revolution. However, energy conservation cannot be achieved through increased efficiency alone. In order for efficiency gains to improve energy conservation, the ecological economists Mathias Wackernagel and William Rees suggest that cost savings from efficiency gains be "taxed away or otherwise removed from further economic circulation. Preferably they should be captured for reinvestment in natural capital rehabilitation."

Jevons Paradox is sometimes used to argue that energy conservation is futile. For example, that more efficient use of oil will not slow the arrival or the effects of peak oil, due to increased demand. This is usually presented as a reason not to increase fuel efficiency (if cars are more efficient, it will simply lead to more driving). However, several points can be raised against this argument. First, in the context of a mature market such as for oil, increased efficiency usually reduces resource use, as demand for the associated good or service is usually inelastic (i.e. does not respond much to prices). Second, improved efficiency may mitigate the fuel shortages and painful disruptions in the global economy caused by the advent of peak oil. Third, even if increased efficiency does not reduce the total amount of resources used, this ignores the additional benefits associated with increased efficiency and increased use. Improved fuel efficiency will at least improve the standard of living for consumers of fuel.

Recent data

The effects of Jevon's paradox in relation to energy efficiency in the United States is not generally apparent. For example, consider household driving patterns:

While total vehicle miles traveled have increased 16 percent between 1991 and 2001, there is no evidence that owners of hybrid vehicles drove twice as much just because their cars were twice as efficient.

The evidence is very similar for green buildings:

...we have not seen evidence that radically more efficient commercial buildings cause people to leave the lights on all night and set their office thermostats five degrees lower. In fact, energy savings in everything from office towers to schools have often been higher than projected. People do not seem to change their behaviors simply because they have a more efficient building.

Household appliances provide the best example for substantial efficiency gains, and refrigerators (which can use as much as 14 percent of a household's total energy) illustrate the point:

Until the late 1970s, the average size of our refrigerators increased steadily and then began leveling off. But, during the same period, the energy those refrigerators used started to decline rapidly. Today's Energy Star refrigerators are 40 percent more efficient than those sold even seven years ago. After all, there is a maximum size to the refrigerator you can easily put in a kitchen and a limit to the number of refrigerators you need in your house. In short, improvements in efficiency have greatly outpaced our need for more and larger storage spaces.

So far, the evidence from the field of more efficient technologies suggests that these technologies do decrease energy use. In the United States, energy efficiency actually works when it's allowed to compete fairly in the market. However, the Jevon's Paradox, and implications for sustainable development on a global scale, may be more complex.