Delhi chief minister Arvind Kejriwal recently announced that from October 1, 2022, his government would only be providing subsidised electricity to those who demand it. Consumers will have online and offline options to opt for and out of the power subsidy given by the Aam Aadmi Party (AAP) government.
The Delhi government provides a 100% waiver on electricity bills for those who use up to 200 units, and a subsidy of Rs 800 for those who consume 201-400 units. From October 1, the automatic application of the waiver on electricity bills will cease to exist.
The chief minister also said that instead of providing the subsidy to financially stronger households, it should be provided to hospitals and schools. Hence, it is expected that financially stable families will not opt for the subsidised electricity.
The AAP government’s policy is an example of nudge theory in economics, which makes it easier for people to choose what is best for them and their society.
Nudge theory is derived from behavioural economics, political theory and behavioural sciences that proposes positive reinforcement and indirect suggestions as ways to influence the behaviour and decision-making of groups or individuals. It was popularised in 2008 by behavioural economist Richard Thaler and legal scholar Cass Sunstein. It has been widely implemented across countries to improve decision-making for healthcare and other sectors.
Thaler and Sunstein explain that a nudge should be considered a “choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid.” For instance, putting a fruit at eye level in the supermarket is considered a nudge as people might be more inclined to choose a healthy eating option. However, banning or taxing junk food is not, as it alters the (cost of) choices available to people.
The Delhi government’s decision to allow consumers to opt for the electricity subsidy is also an example of nudge theory as per its definition. First, the decision is expected to change people’s behaviour in a way that financially weaker households that genuinely require subsidised electricity will be more likely to avail this scheme. Secondly, it does not change any options available to the people as every consumer in Delhi still has the same choice to avail the subsidy. And, thirdly, the intervention of opting for the power subsidy should hopefully be easy, like a single click on a website or an app.
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The idea behind nudge theory and the Delhi government’s electricity scheme is that rather than mandating behaviour, people can be persuaded to make better choices for themselves and society at large. This scheme, if successfully launched, is expected to enroll only those households that genuinely need this subsidy and weed out beneficiaries who can afford electricity at its original, unsubsidised cost.
Such an outcome is expected because of the ‘status quo bias’ theory in behavioural economics, which says that people prefer things to stay the same by doing nothing or by sticking with a decision made previously. Hence, financially well-off people are expected to stick to the default option of not being a part of the electricity subsidy scheme, and this will lead to savings in government finances, which can theoretically be used for other welfare schemes.
However, an important question is, will this programme be successful? Will the Delhi government be able to achieve its aim of saving by subsidising only those who need it, and instead subsidise hospitals and schools? Due to the lack of adequate statistics, we can partly assess the outcome by looking at the success of application of nudge theory by governments of other countries.
In the UK, the government was concerned about the low savings rate among private sector workers. Therefore, it established an automatic enrollment scheme in 2012. The scheme would deduct a fraction of a worker’s salary unless they requested to opt out of the scheme. It helped people save for retirement, because managing funds seems like a complicated decision, and hence, the default auto-enrolment scheme made it easier for employees to achieve higher saving rates. The programme was successful as membership in the private sector pension scheme jumped from 2.7 million in 2012 to 7.7 million in 2016.
Another example of a successful nudge theory application is organ donation. Spain adopted an opt-out procedure where all the citizens are automatically registered for organ donation unless they choose otherwise. The motivation is that people generally want to be donors, if they are involved in an accident, to save someone else’s life, but never find the time to register. The opt-out procedure is the key reason why Spain is considered a world leader in organ donation.
In Delhi, the application of nudge theory to the electricity scheme holds the potential to be successful, and lead to government savings which can be utilised for other welfare schemes. However, it is important to keep in mind that the ultimate success of the intervention will depend on how easy the process is to opt for the subsidy.
Payal Seth is a consultant at Tata-Cornell Institute, Cornell University, USA, and a PhD Scholar at Bennett University.
