Jevons' Paradox

One of the means by which some propose to reduce petroleum consumption is increased technological efficiency. The idea is that if it takes less oil to accomplish our tasks, then we will want and need less oil. However, let's turn that around. If it takes fewer liters of oil to accomplish a given task, then we can accomplish more with a given liter. So what's actually going to happen?

Consider how we normally decide how much of a good or service to buy at any given price, or how much we would be willing to pay for any given quantity of that good or service. Whenever we buy a unit, we are spending money that could be spend on other things. If we are rational, then we decide whether to forgo those other things based upon what they'd do for us, compared to what the unit in question would do for us. All else being equal, the more use (of some sort) that we can get out of that unit, the more that we are willing to forgo of other things. And if something causes the usefulness of a sort of good or service to increase, then we're willing to pay more for it than earlier, and we want to buy more of it at any given price than we would earlier.

It really doesn't matter whether the new usefulness is from an intrinsic change or from an extrinsic change. In other words, if a good or service just itself changes to become more useful (in which case, it's really no longer the same good or service), then we want it more; or if the context changes to allow more to be done with the good or service, then we want it more.

If all of our engines that use petroleum products were magically transformed to do more work-per-gallon — so that petroleum became more useful — then we'd want and use more petroleum.

Here we have the essence of what is called Jevons' Paradox. William Stanley Jevons (one of the preceptors of the Marginal Revolution), in his book The Coal Question (1865), noted that Watts' improvements on the design of the steam engine (so that it could do more work per ton) had been followed by a great increase in the consumption of coal in such engines. The generalization is that, as technological change diminishes the amount of a resources necessary to perform a given task, consumption of that resource may increase.

Note that the point is not merely that the resources left-over by efficiency found use elsewhere, but that efficiency increased over-all use. (I make this point because I've seen Jevons' Paradox misrepresented as if claiming that supply were constant at all prices.)

There's actually not much paradoxical about the alleged paradox; like most economics, it is explained by common sense applied with uncommon care.

So why, then, do petroleum producers join in the protests against legislation mandating greater efficiency? Well, for much the same reason as do the automobile manufacturers. You surely noticed my phrases above, all else being equal and magically transformed. If the technological change mandated by legislation were costless, then industry would rush to adopt it, with or without legislation. But, for industry to want to adopt a technology that has a cost, it has to increase the usefulness of the good or service with a value at least equal to that cost. Otherwise, the increased costs will cut manufacturer profits, in part through reduced sales of automobiles. And it's the latter — fewer cars — that worries the petroleum producers.

Now, one might then say Well, then increased technological efficiency can reduce petroleum consumption, if only in this round-about way! But it really isn't the efficiency that's reducing consumption; it's just the cost. If the same cost were imposed by simply slapping an additional tax on automobiles, petroleum consumption would go down more, because the increased cost wouldn't even be partially offset by greater usefulness from technological efficiency.

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