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