California

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The California IRS has launched a campaign alerting 46,000 households that they could have qualified for the 2009 Earned Income Tax Credit, and that it’s not too late to claim a refund. The average refund is $1,400. Hat tip to the New America Foundation, which estimates that in 2009, one in five Californians eligible for EITC refunds didn’t claim them – 800,000 people left $1.2 billion on the table.

Walking away from “free money”? According to a standard economic model that just shouldn’t happen.

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They cut back under both scenarios. That is the conclusion of a working paper from Peter Reiss of Stanford and Matthew White of the Wharton School at the University of Pennsylvania. The authors traced individual household electricity use in California from 1998-2001. In the first half of this period, electricity prices were relatively flat. In 2000, they doubled over a period of less than two months. After trying a price cap, lawmakers funded a $65 million public awareness campaign in 2001 urging conservation. Because Reiss and White collected monthly meter readings, and had exact time periods for price spikes and media and community outreach (plus random weather events), they are able to perform sophisticated statistical analysis of consumer reactions.

Their assessments about reactions to price rises are unequivocal.

Average household consumption fell thirteen percent over a short span of approximately sixty days, in response to an unannounced price increase. Since these results are obtained from actual (metered) energy use at the consumer level for a large representative sample of households, they leave little room to dispute the magnitude or timing of consumer behavior. The evidence here should be sufficient to dissipate any lingering views that consumers cannot

(or will not) respond quickly to energy price changes.

The assessment about the public awareness campaign is nearly as straight-forward.

The data reveal that the average household reduced its consumption significantly during the state’s public appeals for energy conservation, even though it faced no pecuniary incentive to do so. The fact that public pressure of this sort works at all raises the important question of whether prices or non-price mechanisms should be the preferred means of mediating energy consumption when a market shock requires it.

It can seem absurdly obvious to argue that people react to both financial incentives and social appeals. And yet the tendency to stress one side at the expense of the other in a political debate is often overwhelming. There is even a bit of this tendency in the last sentence above – “whether prices or non-price mechanisms should be…” But we will go on making the argument that the two are not incompatible, and suggest that policymakers think about how to design their non-price mechanisms to complement market events.

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One of behavioral economics’ seminal insights is that people value gains differently than losses. Most of us are loss averse, which means we prefer to avoid a loss more than we enjoy the satisfaction of a seemingly equivalent gain (ie. losing $100 hurts more than winning $100 despite the identical value of the money involved). Economists who have tried to measure loss aversion have found that the odds of equivalent pain to pleasure are approximately 2:1. People will work to avoid losing $50 about as hard as they will to earn $100.

With that ratio in mind, a new survey from the Mineta Transportation Institute in San Jose, California, that asked California citizens about their preferences for “green” vehicle fees for different types of cars revealed the following finding:

Californians similarly supported another green transportation finance option – a new tax-and-rebate system on all new vehicles based on how much they pollute. People who buy a new vehicle that pollutes very little would receive a rebate of up to $1,000, and people who buy a vehicle that pollutes more would pay a tax up to $2,000. People who buy a vehicle that pollutes about the average amount would not pay a fee or receive a rebate. Sixty-five percent of respondents supported this proposal, and only 30 percent opposed it.

Continue reading the post here.

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