Some government innovation

on Sep 28 in Economics tagged by Trevor Hicks

I am someone who frequently complains about top-down government interference in people’s lives. For instance, if the government wants to encourage people to use less gasoline for whatever environmental or economic balance of trade reasons, it can scarcely do it less efficiently than with the CAFE mandates on an automobile manufacturer’s average fuel economy. Just put a tax on gasoline! Is that so hard? That’s completely independent of whether the goal itself is worthy, if the government is going to pursue a goal I just wish it could use simple and efficient mechanisms that are less vulnerable to unintended consequences, rent-seeking and strange compliance measures.

So in general I’m happy to just now learn about the US Department of Energy’s L Prize that offers $10 million to the manufacturer that can develop a new lighting device that produces the same intensity and color of a 60 watt incandescent bulb and while consuming only 10 watts of power. If a bulb exists that saves power while delivering the same performance, people will just buy them without coercion. The Transcapitalist blog where I read about this prize puts it nicely:

It’s the best type of government intervention: nudging through incentivizing rather than new standards that just pass additional costs onto consumers.

But there are some caveats. Check out the eligibility requirements, there’s a nice dose of inefficient protectionism as the LEDs have to be manufactured, assembled and packaged substantially in the United States. I also wonder whether the winner-take-all nature of such a prize is the best method to motivate entries. For risk-neutral large firms that play in this space it probably works fine.

And the DOE did think to require that entries be submitted with a credible manufacturing and retailing plan, but they only require the capability to produce 250,000 units priced at $30 each, dropping to $8 in 3 years. The bulbs would also be expected to last for 25,000 hours. Let’s do a little math on the cost effectiveness of such a bulb, Using a 10 watt bulb for 25,000 hours means 250 KW hours are consumed over its lifetime. My electricity costs about $.10 per KW hour, so that’s about $25 in energy costs for me. Assuming a single incandescent bulb lasts this long, it still consume 6 times the energy or $150 in power. So completely ignoring durability differences and also time value of money considerations, the new bulb would save me $125 in power costs. So the fact that I would be able to get it for much less than that makes it an obvious buy even if the incandescent bulbs were free based only on power savings.

Philips has submitted an entry and the DOE is evaluating it now. It will be interesting to see what comes of this program.