We have seen that reality is more complex than just correcting externalities and relying on the market. Let's try to understand what a source of these extra complexity comes from. There is a study by Tavoni and others who claims that the potential emission reduction via carbon pricing is as low as 26 percent. I'm always puzzled when you get exactly 26, why didn't they say a quarter? But let's leave that to one side and it says 26 percent. Now the question is, how do we go from a silver bullet to a quarter of a bullet? One has to consider which emitters are directly or indirectly sensitive to the price signals. Whether consumers sends signals efficiently, and perhaps most important, whether consumers respond elastically. What does it mean that their respond changes a lot for a change in price? Respond elastically to price inducement. It means whether they are responsive to a change in price. Let's see in practice what this means. One of leavers which are pulled by price signals, if the response of consumers to the higher passed on prices. How well does it work? Well in practice, not very well. There had been many empirical studies and I am just relaying a few examples here. Typically, drivers do not buy car which cost more upfront and they are fuel more efficient. You're going to save on fuel in the future unless the upfront cost is paid back in as little or as few as one or two years of fuel saving, which is a very high demand. Another very important irrationality, let's say, is the following. A landlord typically does not, not typically almost universally does not pay the utility bills. But the renter has no incentive to make a capital investment to make the heating system more efficient they could just only going to live there for a year or two. Now, if everybody were rational, the landlord would put in an efficient heating system and charge a bit more in rent. Therefore, this is the economically efficient way. Unfortunately, renters do not buy. It is slightly higher rent, even if they realized that their heating bills will be slightly lower. Similarly, homeowners do not invest in solar panels unless the payback in reduced bills is under three or four years. Perhaps moving away from, this is called strange discount factors. This implies very an implausible discount factors. But apart from this, there could also be the fact that many of these things like installing a solar panel, perhaps the homeowner is rational, but there is a big capital outlay at the beginning. Therefore as I say, well I would like to do it but I can't afford to do it. In one study, it was based on the choices of high price energy-efficient refrigerator. An economists managed to establish that the implied discount rate was as high as 50 percent, which means I must save in electricity bill on a refrigerator basically in two years. Virtually impossible, I don't know otherwise what you'll be refrigerating. In general, consumers demands rate of return on their efficiency outlays in the range of 20-100 percent. This means that the efficiency investment must often pay for itself in as little as one year. The carbon tax needed to overcome this inertia would have to be huge. You might say; well, so much for individual consumers, but perhaps companies are more efficient. Well, this is not always the case. For instance, it is observed that gas leaks from oil pipes are inefficiently fixed, even the NPV of fixing them is positive. It is low salience, it is not a problem that jumps to the attention of the risk committee of a boardroom they're quarterly meeting. Is that what it's called the distributed nuisance? That isn't one huge leaking in one point that you go and fix. There are more profitable projects. Yes, it has a positive NPV, but we think we can do something more profitable elsewhere and also probably we will not be a great report to the shareholders saying our great strategic initiative of the next tier is to fix the oil leaks, etc. Furthermore, when we move away from non-energy firms, there is a high level of indifference towards energy costs. For instance, electricity, heating bills, air conditioning bills are typically very poorly scrutinized. There is an institutional setup. Most companies have separate budget for capital and operating expenses. Saving in operating expenses that comes at the cost of expenditure of capital outlays are rarely approved. Where am I going with all of this? The point it's I'm going, I am highlighting one source of market inefficiency beyond the market inefficiency, we always think of, which is the externality which is not priced. If we want to still rely on market mechanism, we have to price, not just the externality, but somehow we have to overcome this decisional inertia that stands in the way of adopting positive NPV projects.