The Unexpected Consequences of More Efficient Lighting

With one LED bulb lasting up to 100 times as long as an incandescent bulb and 10 times longer than fluorescent lights, you can see why the scientists who developed LED lighting just received the Nobel Prize in Physics for the energy and materials their innovation will save.

A 19th century economist would disagree.

In The Coal Question (1865), William Jevons tells us that, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.”

Called the rebound effect, 150 years ago, the efficiency created by the steam engine encouraged more coal use rather than less. After that, as we moved from coal to whale oil to kerosene and electricity, more efficiency expanded energy use as the market responded to a better, cheaper product.

And therein lies the rebound effect. Described in a Congressional Research Service (CRS) report, the rebound effect has a triple source:

1. We use more energy because it is less expensive. When gas is cheaper we tend to drive more.
2. With the money we do save, other energy guzzling purchases become affordable.
3. Lower resource prices can encourage subsequent innovations that increase the use of that resource. Starting as illumination, electricity spread to run our appliances.

But, the CRS report also explains that the rebound effect is most evident in a developing economy because slack demand provides considerable room for a boost in energy use. By contrast, in a mature market, the rebound effect is less pronounced and more unpredictable.

Indeed, imagine an entire world that is LED lit at night rather than (below) developed and urban areas.

Our Bottom Line: Opportunity Cost

As economists, we can say it is all about opportunity cost. As the opportunity cost of using a commodity decreases, we tend to use more of it. Diminished opportunity cost is one reason that demand slopes downward. The lower the price, the more we want because we sacrifice less to get it.