Resources and Energy 8 (1986) 185497. North-Holland zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQ FUEL CONSERVATION UNDER RATIONAL EXPECTATIONS OF THE ENERGY PRICE EVOLUTION F. WIRL* University of zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONM ‘lkhno lo g y . Vie nna. Austria Received November 1984 final version received November 1985 It is supposed, that a consumer demands a ‘service’ rather than a commodity. This service can be generated from a durabk and nondurable good, e.g. ‘thermal comfort’ is the product of two at least partially substitutable factors: fuel and capital (insulation. heating system). Now, the choice of an eflicient fuel conservation programme requires that the consumers integrate the counteractions of the energy producers. This leads formally to a (differential) game situation, where it will be shown that the expansion of capita) stock based on a myopic analysis may lead to a too large investment in fuel conservation. 1. Introduction This paper picks up a particular aspect of energy conservation, namely anticipating the future energy price from the profitability of individual conservation investments and deciding then on the allocation of an adequate budget. This interdependence is often neglected by analysts, who depart, usually, from increasing fuel prices to ‘prove’ that fuel conservation is highly profitable and will cut fuel demand substantially. However, this way of reasoning neglects that the market price for fuels depends on the actual demand pressure, and a shift in the demand curve - due to the aggregate of individual profitability considerations of the above type - may imply prices different from the ones assessed at the beginning of the investment venture. Since energy conservation seems to be an important target for policy makers in the industrialized world, the following critical remarks contain also a political dimension. To address the interactions between consumers and producer(s) a differen- tial game situation is modelled. Actually, since the analysis is purely theoreti- cal, the underlying model may cover also situations other than the one indicated in the title. The integration of rational consumer demand over time derived from optimizing relation seems to be lacking in many articles *I am grateful for valuable comments from P. Jansen. E. Dockner and from the anonymous referee. 0165-0572/86/S3.50 0 1986. Elsevier Science Publishers B.V. (North-Holland)