The efficiency rationale for any government regulation rests on the existence of some type of market failure. The ways markets may fail are quite diverse, ranging from characteristics of the market structure to various kinds of externalities; that is, adverse effects on parties other than the buyer and seller of a product. In the absence of some type of market failure there is no legitimate basis for regulation from the standpoint of enhancing economic efficiency.

This article examines a major class of recent government initiatives by the U.S. Department of Energy (DOE), the U.S. Environmental Protection Agency (EPA), and the U.S. Department of Transportation (DOT) pertaining to energy efficiency (as distinct from economic efficiency). The regulations of interest all pertain to consumer products that are durable goods. There may be some kind of market failure with respect to the energy usage of these products, as energy use leads to environmental consequences. However, the existence of an imperfection alone cannot justify all regulations that take the form of government intrusion into the marketplace to override consumer choices. We examine the justification for these energy regulations and show that demonstrable market failures are largely incidental to an assessment of the merits of these regulations. Rather, the preponderance of the assessed benefits is derived from an assumption of irrational consumer choice. The impetus for the new wave of energy-efficiency regulations has little to do with externalities. Instead, the regulations are based on an assumption that government choices better reflect the preferences of consumers and firms than the choices consumers and firms would make themselves. In the absence of these claimed private benefits of the regulation, the costs to society dwarf the estimated benefits.