Page 31 - Policy Economic Report_Feb'25

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Lessons from Economics

Jevons Paradox

In economics, the Jevons paradox occurs when technological advancements make a resource more
efficient to use (thereby reducing the amount needed for a single application); however, as the cost of
using the resource drops, the overall demand increases causing total resource consumption to rise.

The concept was proposed by William Stanley Jevons in 1865, observing that improved coal efficiency led
to higher coal consumption instead of savings.

Factors Influencing Jevons Paradox:

o Cost Reduction: Lower usage costs drive higher demand.
o Increased Accessibility: Efficiency makes resources more widespread.
o Economic Growth: Higher productivity spurs industrial expansion.
o Elastic Demand: When demand is highly responsive to price changes, consumption rises sharply.

For instance: -

Economists have observed that consumers tend to travel more when their cars are more fuel efficient,
causing a 'rebound' in the demand for fuel. An increase in the efficiency with which a resource (e.g., fuel)
is used causes a decrease in the cost of using that resource. A decrease in the cost (or price) of a good or
service will increase the quantity demanded (the law of demand). With a lower cost for travel, consumers
will travel more, increasing the demand for fuel. This increase in demand is known as the rebound effect.
The Jevons paradox occurs when the rebound effect is greater than 100%, exceeding the original efficiency
gains.

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