Weapons of reason: Jevons' paradox

"The Earth provides enough to satisfy every man's need but not for every man's greed." ― Mohandas Gandhi

Jevons' paradox is an example of how economics can defy common sense.  We use energy for useful things, such as manufacturing or transportation.  Creating machines that can use energy more efficiently can help to reduces prices and reduce our consumption of fuel.  However, the latter is not guaranteed.  150 years ago, an economist named William Jevons realized that more cost-effective coal plants resulted in an increased demand for coal.  However, the increase in demand was greater than the increase in efficiency, which meant the industry was consuming more coal, rather than less.

Jevons' paradox is more likely to occur in cases of elastic demand, where demand more than doubles when cost is cut in half.

Price elasticity is necessary to understanding how Jevons' paradox occurs.$$\text {Elasticity} = \frac{\text{Percent change in demand}}{\text{Percent change in price}}$$Elasticity is typically a negative number. More negative values represent more elastic price—that is, the products demand changes faster with a given change in price.  Energy efficiency is not the only contributing factor to price, but more efficient use of energy will cause lower prices.  Because of other factors, Jevons' paradox is likely to occur only in cases of high elasticity when energy efficiency is the only change.  Energy demand is typically inelastic in the short-term; but, it can be substantially higher in the long-term.  If price can be reduced without an increase of energy efficiency, then the corresponding increase in demand will naturally increase overall energy consumption.


The Luddite response—which is too reactionary—would be to never improve energy efficiency.  There are two obvious problems with this.  First, improving energy efficiency doesn't always lead to Jevons' paradox.  Second, society could potentially benefit from increases to energy efficiency.  Instead, new technologies need to be combined with new policies that would help offset any increases in fuel consumption.  An example would be a green tax, which incentivizes manufacturers to create less pollution—perhaps by burning fewer fossil fuels.