Abstract
As renewed attention has been given by policy makers to energy conservation issues, it has frequently been asserted that an energy-efficiency gap exists between actual and optimal energy use. The critical question is how to define the optimal level of energy efficiency. Some confusing strands of argument that are frequently brought to bear on this question are disentangled by identifying the major conceptual issues that determine the set of feasible answers. Five separate and distinct notions of optimality are identified: 1. the economists' economic potential, 2. the technologists' economic potential, 3. hypothetical potential, 4. the narrow social optimum, and 5. the true social optimum. Each of these has associated with it a corresponding definition of the energy-efficiency gap. The analysis demonstrates that necessary preconditions for identifying the right measure of energy-efficiency gap include understanding and disentangling market failure and non-market failure explanations for the gradual diffusion of energy-efficient technologies.