The efficiency standards of refrigerators in the state of California are the subject of a favorite anecdote told by Nobel prize-winning physicist Steven Chu (who appears now to be president-elect Obama's pick for energy secretary). He often includes this anecdote in his public talks about how scientists and governments need to address the global climate crisis. Chu is a staunch advocate for a national engineering and scientific project to mitigate the effects of anthropogenic global warming, and under his directorship since 2004 the Lawrence Berkeley National Laboratory has put a lot of its resources into research projects related to renewable energy (mainly solar power) and energy efficiency (mainly energy-efficient building design).

The way Chu tells the story about refrigerators is the following: when California set about to enact ambitious efficiency standards for refrigerators in the 1970s, it met a lot of resistance from industry groups. What the groups tried to tell the legislators and to convince the public was that higher standards would mean much more expensive refrigerators for the consumer. The standards California was contemplating, they said, could not be achieved with foreseeable technology at any reasonable price. When California imposed the ambitious standards nevertheless, it forced the manufacturers to innovate. What ended up happening belied the industry groups' claims: the average refrigerator in California is now twice as cheap (adjusted for inflation), three times more efficient, and 10 percent bigger.

Obviously, there was a market failure in the refrigerator business. Manufacturers did not feel a pressure to compete in efficiency, because they banded together in their industry groups to fight the efficiency standards. The new standards created the simultaneous incentive for all of the manufacturers to improve their refrigerators' efficiencies competitively, and instead of paying the lobbyists to fight the legislation, they had to start paying the engineers to innovate.


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