03 Mar 2018

The Jevons paradox is a counterintuitive effect in which an increase in the efficiency with which a resource is used results in an increase in the consumption of that resource. It was first described by the English economist William Stanley Jevons in his 1865 book The Coal Question, in which he pointed out that James Watt's improved steam engine design, which made the coal-powered steam engine much more efficient as an energy source, led to an increase in coal consumption because the steam engine became more widely adopted by industry.

This is a major issue in environmental economics because it can mean that making things more fuel efficient results in more fuel being used. An example is energy-efficient light bulbs. Suppose one bulb provides $10/hour of benefit ("utility") and two bulbs provide$15/hour of benefit. If the cost of keeping a bulb lit is $6/hour then the net utility of one bulb is (10 - 6 =)$4/hour and the net utility of two bulbs is (15 - 12 =) $3/hour. But if improvements in electricity mean that you only need$4/hour of electricity to keep a bulb lit then it makes more sense to use two bulbs, since you get (15 - 8 =) $7/hour of net utility versus (10 - 4 =)$6/hour of net utility with one. So the economically rational thing to do is use two bulbs, even though this uses more electricity.

This rebound effect is the key to the Jevons paradox. Conventional economic thinking assumes that reducing the cost of something increases the demand for it. If the demand increases rapidly with a reduction in price -- if the demand is "elastic" -- then an increase in efficiency increases the net consumption and we have a Jevons paradox. On the other hand if the demand doesn't increase much even with a big reduction in price -- if the demand is inelastic --s then consumption decreases. There's also an indirect effect, since savings in one area (bulbs) can be used to pay for something else (more air conditioning, for instance).

This is a microeconomic argument, focusing on individual consumers. There's also a macroeconomic argument: more efficient energy use is good for the economy, stimulating more resource consumption, and similar considerations of price elasticity apply.

So are technology-driven improvements in efficiency ultimately bad for the environment? It all depends on the size of the rebound effect. This is very difficult to measure and so there are people on both sides of the argument (large rebound effect, small rebound effect). When I think about myself and the people around me, demand seems to be pretty inelastic, probably because people are irrational: they replace one inefficient bulb with one efficient bulb, not two. But obviously this is just anecdotal.

Governments, corporations, etc. generally ignore the Jevons paradox, blindly pushing for improvements in energy efficiency, but the paradox is actually another reason to implement caps or taxes on resource consumption. The correct way of dealing with it is to tax improvements in efficiency, and Jevons himself realized that government interventions, whether through taxes or through hard caps, were needed to control English coal consumption in the second half of the 19th century.

(This is an interesting paper showing that Jevons paradox is less relevant for water consumption than for energy consumption because water consumption is often very inelastic, constrained by water availability more than price.)