NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS by Richard H. Thaler and Cass R. Sunstein Penguin Books, 2009, 312 pp, ISBN 978-0-14-311526-7This book is best described formally as a general explanation of and advocacy for libertarian paternalism, a term coined by the authors in earlier publications. Informally, it is about how leaders, systems, organizations, and governments can nudge people to do the things the nudgers want and need done for the betterment of the nudgees, or of society. It is paternalism in the sense that "it is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, healthier, and better", (p. 5) It is libertarian in that "people should be free to do what they like - and to opt out of undesirable arrangements if they want to do so", (p. 5) The built-in possibility of opting out or making a different choice preserves freedom of choice even though people's behavior has been influenced by the nature of the presentation of the information or by the structure of the decisionmaking system. I had never heard of libertarian paternalism before reading this book, and I now find it fascinating.Written for a general audience, this book contains mostly social and behavioral science theory and models, but there is considerable discussion of structure and process that has roots in mathematical and quantitative modeling. One of the main applications of this social system is economic choice in investing, selecting and purchasing products and services, systems of taxes, banking (mortgages, borrowing, savings), and retirement systems. Other quantitative social choice systems discussed include environmental effects, health care plans, gambling, and organ donations. Softer issues that are also subject to a nudge-based approach are marriage, education, eating, drinking, smoking, influence, spread of information, and politics. There is something in this book for everyone.The basis for this libertarian paternalism concept is in the social theory called "science of choice", the study of the design and implementation of influence systems on various kinds of people. The terms Econs and Humans, are used to refer to people with either considerable or little rational decision-making talent, respectively. The various libertarian paternalism concepts and systems presented are tested and compared in light of these two types of people. Two foundational issues that this book has in common with another book, Network of Echoes: Imitation, Innovation and Invisible Leaders, that was also reviewed for this issue of the Journal are that 1 ) there are two modes of thinking (or components of the brain) - an automatic (intuitive) process and a reflective (rational) process and 2) the need for conformity and the desire for imitation are powerful forces in human behavior. …

Nudge: Improving Decisions about Health, Wealth, and Happiness

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The Theory of Industrial Organization

Blowing the whistle

The antitrust paradox: a policy at war with itself

In this study, I examine a causal effect of billing frequency on consumer behavior. I exploit a natural experiment in which residential water customers transitioned exogenously from bi-monthly to monthly billing. I find that customers increase consumption by approximately 5 percent in response to more frequent information. This result is reconciled in a model of price uncertainty, where increases in billing frequency reduce the distortion in consumers' perception of price. Using treatment effects as sufficient statistics, I calculate gains in consumer surplus equivalent to 0.5-1 percent of annual water expenditures. Heterogeneous treatment effects suggest increases in outdoor water use.

Information Provision and Consumer Behavior: A Natural Experiment in Billing Frequency

Water scarcity is a global concern. Even in non-drought situations the political and economic costs of developing water resources may favour conservation. Using a single high price to constrain demand raises distributional and political challenges. Increasing block tariffs (IBTs) have been proposed as a solution, balancing incentives for conservation with an equitable distribution of costs across households. Our survey indicates the international evidence on using IBTs to conserve water is mixed, highlighting the operational challenges of implementing effective IBTs. An alternative approach that may side-step affordability concerns are non-price conservation interventions. Robust evidence on behavioural interventions to conserve water is limited, although social comparisons appear effective. Nevertheless, existing price and behavioural interventions have typically been implemented in response to droughts, thus caution is needed when generalising this evidence to non-drought situations. We discuss the applicability of IBTs to the UK, highlighting an essential pre-condition is detailed research to understand a locality’s water consumers and their water demand.

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Price and Behavioural Signals to Encourage Household Water Conservation: Implications for the UK

We compare the wholesale model and the agency model that characterise a vertical relation in a bilateral duopoly framework. Results suggest that the agency model may be regarded as an example of retailer power resale price maintenance and provide an economic view of why restraints of this kind should be evaluated under the rule of reason. While competition is more likely to be undercut under the agency model, relative to the wholesale model, the agency model benefits consumers by offering relatively lower retail prices and greater demand.

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A Comparison of the Wholesale Model and the Agency Model in Differentiated Markets

Increasing use of distributed generation, the introduction of Electric Vehicles and smart technologies and changing patterns of energy demand have all changed the way in which the distribution network for electricity is used, both in Europe and worldwide. These changes raise the question not only of how distribution systems should be used, but also how costs should be met. In particular, there are concerns about whether costs of ‘traditional’ networks will be stranded, and, if so, who will bear the costs. 

The Clean Energy Package, proposed by the European Commission in 2016, emphasises the importance of competitive prices, efficiency and non-discrimination. It focuses on cost as a basis for tariffs, which should also allow consumers to feed in their own generation, and to pay the appropriate share of distribution system costs. The Package also acknowledges the importance of social objectives by individual Member States, while reiterating prohibition of specific cross-subsidies. 

Within this cost-related framework this report outlines some concepts of fairness, emphasising that this criterion does not deliver a unique template, but depends both on how some costs are allocated and on different interpretations of fairness. We review some existing tariff structures, and simulate the effects of some structures through ‘notional’ households, allowing some households to selfgenerate. When consumers respond very differently to tariff signals, those who are unwilling or unable to respond to changing tariffs may find themselves bearing a greater burden of the system’s costs, which raises particular issues around fairness.

Designing distribution network tariffs that are fair for different consumer groups

The authors welcome the opportunity to respond to Ofgem consultation on the best way of setting the transmission and distribution residual charges. We agree with Ofgem’s basic approach to fairness, which reflects our own assessment of fairness in distribution charges in a more general context, prepared for BEUC. 1 We also agree that a major principle behind recovering costs which are ‘legacy’ rather than forward looking costs, as in the Ofgem consultation, should be to distort consumption and investment decisions as little as possible. Our report majors on domestic customers, most of whom are more likely to alter their demand than to decide to leave the network altogether as a result of price changes. Therefore we agree that the principle of least distortion, as well as the other criteria outlined by Ofgem (in particular practicality and proportionality) indicate that a per customer charge is an appropriate basis for ‘residual charges’. We do not comment specifically on Embedded Benefits, but agree that similar principles should apply.

Response to Ofgem consultation on targeted charging review: minded to decision and draft impact assessment

Following the Department for Environment, Food & Rural Affairs (Defra) of the UK’s call in its recent Water Efficiency and Behaviour Change Rapid Evidence Assessment 2018, this paper seeks to understand the key barriers of conducting effective information-based interventions to encourage household water efficiency in England and Wales and the associated implications. We review the evidence of information provision to conserve water in England and Wales. We then set out the current key barriers, highlight what might have constituted to the barriers and, based on learnings from the literature, clarify some underlying confusion and suggest ways to improve.

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Liang Lu

Papers

Price and Behavioural Signals to Encourage Household Water Conservation: Implications for the UK

A Comparison of the Wholesale Model and the Agency Model in Differentiated Markets

Designing distribution network tariffs that are fair for different consumer groups

Response to Ofgem consultation on targeted charging review: minded to decision and draft impact assessment

Information-based interventions for household water efficiency in England and Wales: Evidence, barriers and learning opportunities