Principle #5: People respond to incentives; there are often unintended consequences
Objectives:
State and give examples of the Law of Unintended Consequences
Use five steps to analyze the potential unintended consequences of public policy
Why do you want to learn this?
The fifth step of the decision-making process is to review the consequences to decide whether you want to rethink the decision. Many decisions seem like a good idea at the time that they are made but have consequences that were not foreseen and do more harm than good. The more accurately you can look ahead to forsee the consequences, the more likely you are to be happy with your decision.
Economic policies are intended to change the benefit/cost ratio for people in order to change their actions to achieve desired social goals. Unfortunately, some policies provide perverse incentives where well-intentioned policy makers fail to predict unanticipated consequences. The Law of Unintended Consequences states that public policy often provides perverse incentives that worsen a problem rather than diminishing it. When a policy is imposed, the policy makers assume that two alternatives exist; those affected will either comply with the policy or suffer the disadvantages of non-compliance. The policy is expected to change the benefits or costs of the action which is being encouraged or discouraged. In some cases, however, the individuals affected by the policy come up with a third alternative that actually produces the opposite of the intended effect, worsening the situation that the policy is intended to improve.
Below are a few examples of policies that provide perverse incentives resulting in unintended consequences.
Policy makers in Mexico City decided that a good way to reduce pollution in one of the most highly polluted cities in the world would be to have drivers alternate driving days depending on the last number of their license plates. Those with plates ending in even numbers would drive on certain days and those with plates ending in odd numbers would drive on alternate days. Some drivers in Mexico City, however, found an alternative that had not been considered by the policy makers, they bought old highly polluting second cars with license plates ending in the opposite numbers from the plates on their original cars, enabling them to drive every day of the week. The unintended consequence of the policy was even greater pollution in Mexico City.
Many parents tell their children to avoid talking to strangers, with the intention of keeping the children safe by avoiding dangerous situations with unfamiliar people with evil intentions. There are two problems with this admonition. First, according to the Child Molestation Research & Prevention Institute, a nonprofit research organization, about 90% of child molestations are done by family members or close friends of the family. Second, children in danger from other causes may shy away from people who are trying to rescue them. A Utah cub scout remained lost in the woods for four days because he hid from search and rescue volunteers out of fear they would steal him.
For the purpose of increasing child safety, some airlines charged parents to place their young children in special “child seats” much like car seats. The seats were more expensive than regular seats and increased the cost of flying with young children. As a result, some parents chose to drive rather than fly. Since it is argued that driving is less safe than flying, the safety of the children actually decreased.
Many well-meaning teachers have encouraged their students to save their money and send it to an organization that uses it to free slaves from their captors in different parts of the world. The problem is that the additional money increased the demand for slaves, increasing their price. Slave traders have reacted by increasing their efforts to capture slaves, increasing slavery around the world. An attempt to reduce slavery has increased it.
One policy that some school districts use to increase educational quality is to pay teachers according to the increase in their students’ test scores. 44 schools and 180 educators in the Atlanta were involved in a testing scandal where they cheated to increase test scores using tactics such as having slower students stay home during testing, giving students test questions and answers ahead of time, changing students’ answers, and others. The incentives were simply too strong for some teachers to resist.
In different times and different places around the world, in an effort to reduce pests such as rats and snakes, governments have paid people to bring in the dead pests. People have raised the pests, killed them and brought in the dead pests for the money. The pest population increased.
Some governments have banned smoking in an attempt to increase the health of both smokers and those around smokers. The policy has worked to a certain extent as some people quit smoking. But people who quit smoking tend to eat more, increasing their weight considerably. Instead of making people more healthy, the policy has caused some people to replace one unhealthy habit with another.
In an attempt to reduce crime, some cities are rewarding their law enforcement agencies with additional funding if their crime rates go down. Some agencies have responded by simply reporting and prosecuting fewer crimes, thus reducing public safety.
Below is a summary of the discussion.
Goal | Policy | Third alternative or action | Result |
Reduce pollution in Mexico City | Only drive according to license plate | Buy old car with different numbered license plate | More pollution |
Improve child safety | Don’t talk to strangers | Lost children avoid strange rescuers | Children less safe |
Improve child safety when travelling | Fliers must pay for child seat on airplanes | Family drives, less safe than flying | Children less safe |
Reduce slavery | Children save to buy slaves | Demand for slaves increases | Slavery increases |
Reduce rat population | Pay for dead rats tails | People raise rats then kill them and sell tails | Rat population increases |
Improve smokers’ health | Ban smoking | Smokers quit smoking but eat more, gaining weight | Smoker’s health decreases |
Bottom Line: Public policies may provide perverse incentives that produce unintended consequences.
The Law of Unintended Consequences – Public policy often provides perverse incentives that make the problem worse rather than better.
Analyzing the unintended consequences of public policy.
Step1: What is the policy?
Step 2: What is the problem that the policy is meant to address?
Step 3: Who will/does the policy affect?
Step 4: What alternative actions might those affected choose to take to thwart the intention of the policy?
Step 5: How does your answer to #4 affect the efficacy of the policy; does the policy achieve its goal?
1. The smog in Mexico City worsening as a result of government policies to reduce the smog is an example of a(n):
a. Unintended consequences/perverse incentives
b. Ill-informed consumer decisions
c. Decrease in demand
d. Decrease in supply
2. In an effort to reduce the number of unreturned books, the school district has enacted a policy that grades will not be reported to parents whose students have unreturned books. What effect would you expect the policy to have on the number of unreturned books? What economic concept provides the answer?
3. Break into small groups and identify unintended consequences that might result from the following policies.
a. In an effort to help those who have lost their jobs as a result of the pandemic, the Biden administration extended unemployment benefits to Sept, 2021.
b. To increase student achievement, districts pay teachers according to students’ scores on district wide exams.
c. To reduce crime, police pay is influenced by a reduction in crimes reported in their precincts.
d. To provide incentives for their students, parents pay for higher grades.