On September 8, Scott Sumner posted about how Californians cut electricity usage in response to a request from California’s Office of Emergency Services. I commented that I thought this was wonderful.
In response, my former Hoover colleague Alvin Rabushka sent the following email to Scott and me:
Gentlemen,
I moved into my Stanford Campus Residence on July 3, 1976 (still there). At that time, there were 604 single family residences and 82 small condos built for retirees on campus.
Homes were not metered. Homeowners paid a monthly water fee with no restrictions on consumption. Homeowners with pools typically drained and refilled them annually.
1975-76 was a dry year. The drought continued into the following year. Stanford’s water reserves from the Hetch Hetchy Reservoir were falling dangerously low.
In autumn 1976, Stanford requested all homeowners to reduce their water consumption, advising those with pools not to drain and refill them.
What happened? Water consumption fell 50% over the next academic year. Monthly water charges remained unchanged.
The rains return in 1977/78. Also, Stanford installed water meters and charged for amount consumed.
I recall discussing this reduced consumption with Sam Peltzman, Sherwin Rosen, and other visiting economists at Hoover that year and the next. They were stunned that such a large reduction in consumption took place with no increase in price.
Alvin
READER COMMENTS
Phil H
Oct 22 2022 at 4:54am
It seems a bit like the “pay whatever you think is fair” model that some bands used to release albums for a while (with varying degrees of success, as I recall). Within a certain community, where people feel like there is a recognisable fair standard, a large proportion of people will be willing to do the fair thing.
I guess it breaks down when transactions become too large or abstract. I guess most people recognise that a pool is a luxury that they can and should go without in time of need, but I don’t think anyone has a simple instinct for how many shares it’s fair for them to own. And when transactions occur between businesses, there is no instinct for fairness. So for the more complex areas of the economy, strict rules and contract law will be necessary to achieve the same kind of coordination.
David Henderson
Oct 22 2022 at 10:03am
I agree.
I am an empiricist as well as a theoretician and so when I notice interesting phenomena, I report them.
Vivian Darkbloom
Oct 22 2022 at 11:29am
“In autumn 1976, Stanford requested all homeowners to reduce their water consumption, advising those with pools not to drain and refill them.
What happened? Water consumption fell 50% over the next academic year. Monthly water charges remained unchanged.
The rains return in 1977/78. Also, Stanford installed water meters and charged for amount consumed.”
That sounds commendable; however, I’d need a little clarity on the timeline before I would draw a conclusion. It’s not entirely clear when Stanford installed meters and started charging for consumption, or announced they would make the change. It sounds like the meters were installed in 1977 or 1978 (i.e., “during the next academic year”; that is, the same year water consumption was said to have been reduced by 50 percent). . If Stanford started charging for the amount consumed rather than a flat fee in academic year 1977/1978, it strikes me that they *did* raise prices, at least at the margin.
Charging for actual consumption sounds like a better economic policy lesson here than assuming everyone will voluntarily “do the right thing”.
Jon Murphy
Oct 22 2022 at 12:45pm
I read the timeline as:
Academic year 76-77: drought, request made, consumptions falls 50%
Academic year 77-78: Meters installed
David Henderson
Oct 22 2022 at 3:48pm
That’s how I read it.
And I’m not concluding that they shouldn’t have raised prices. It’s just a counterexample to my general view of the world.
Jeff Hummel
Oct 22 2022 at 5:00pm
These cases remind me of one that operated in the opposite direction. It involves a daycare center in Israel, and it is described in Dan Ariely’s Predictably Irrational. The center faced a problem of parents showing up late to pick their kids up. The center imposed a fine on parents showing up late. The result was the opposite of what was expected. More parents showed up late. Ariely’s explanation was that people move between two realms with different standards: social normsand market norms. By imposing the fine, their behavior switched from being governed by social norms to market norms, as they no longer felt guilty about showing up late. I see this dichotomy frequently not only in the views and behavior of others but sometimes in my own reactions. What is interesting is that when the fine was lifted, the parents’ behavior did not revert back to social norms.
I do not favor any of the policy proposals of behavioral economists. But I do think that some of their work has revealed fascinating insights about how people act. In addition to Ariely’s book, one of the most enlightening I’ve read on this topic is Daniel Kahneman’s Thinking Fast and Slow, recommended to me by David Friedman.
David Henderson
Oct 23 2022 at 11:18am
Like you, I don’t favor the policy proposals of behavioral economists, or, I should say, I don’t favor most of them. In my review of Thaler and Sunstein years ago, I pointed out a few that I do favor–the libertarian ones, of course. 🙂
Also like you, I think they present interesting evidence that occasionally contradicts my view of how the world works.
I seem to remember reading lately that the Israel daycare story isn’t as clearcut as we have heard. One thing that gives credibility to the idea that it’s not that clearcut is Ariely’s being caught with potentially fabricated data.
See this: https://datacolada.org/98
Jon Murphy
Oct 22 2022 at 5:33pm
Great story. I suspect one of the reason the request worked so well was because pool draining/refilling is a fairly easy thing to monitor and enforce compliance.
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