Principle #5: People respond to incentives: there are often unintended consequences.
Objectives:
Identify the incentives and disincentives of decision makers.
Provide examples of the Tragedy of the Commons to explain the link between property rights and conservation and preservation of resources
Why do you want to learn this?
Incentives are the key to understanding decisions that people make. Students, siblings, parents, teachers, school administrators, clergy, policy makers…in fact all decision makers respond to incentives. If you want to influence people’s decisions, you have to know what incentives influence them.
Some people say that economics is nothing more than applied psychology and there is some truth to that. Economics helps you understand why people make the decisions they make and it can be a guide to helping you make more informed decisions. An incentive is something that encourages a person to do something by increasing the benefits of the action. A disincentive is something that discourages a person from doing something by increasing the cost of the action. A bonus is sometimes paid to a worker who does exceptional work. Often an incentive is nothing more than a slap on the back or a certificate for student of the month or worker of the month. Profit is an incentive for entrepreneurs, pleasure or utility is the incentive for consumers. Examples of disincentives include traffic fines, poor grades for poor work, penalties for failing to file tax returns or pay other bills on time, parental disapproval for breaking house rules.
In order to understand the decisions people make, you need to identify their incentives. Let’s assume that you see an increase in the amount of trash that is recycled and you want to know why this is happening. The obvious answer is that the incentives have changed. Either someone is paying more for recycled goods, or environmentalists have become more successful at convincing people of the benefits to themselves or to the environment from recycling or the price of collecting non-recycled trash has increased. Whatever the case, you know that changes in behavior indicate that either the costs or benefits of the action have changed.
Property rights are a type of incentive; they encourage people to conserve and improve resources. Most people don’t wash rental cars before returning them but they do wash their own cars. Some people don’t collect their dogs’ waste from public places but they do pick it up from their own yards. Most graffiti does not appear on private homes. If you own it, you are more likely to care for it than if you don’t own it. You would never run a hose from your car to your living room, polluting your living room, but you do drive a car from your home to someplace else, polluting the air above you because you do not own that air. Once European serfs were no longer “slaves” of their lords, they began to use local forests for firewood, eventually destroying the forests. The “Tragedy of the Commons” occurs when public resources with no property rights are overused and, occasionally completely destroyed. Wildlife examples include the Woolly Mammoth, the Saber Toothed Tiger, and other extinct species. Bison are making a comeback because they are being raised for commercial use.
It is hard to realize that some property owners consider elephants, bison, prairie dogs, and other animals to be nuisances. Birds of prey such as the bald eagle are revered by some but despised by others since they eat chickens and other fowl that are raised for profit. For those of us who do not have elephants tromping through our front yards, running over our children and destroying our crops, it is hard to imagine that anyone would want to kill the magnificent beasts. If the Environmental Protection Agency (EPA) decides that a prairie dog is an endangered species and nothing can be done to them on a rancher’s land, this is likely to anger the ranchers. Cattle and horses are prone to trip in their holes and break legs. There is an incentive for the rancher to SSS (shoot, shovel, and shut up). So a policy that was meant to conserve wildlife may do just the opposite.
To preserve their elephants, the government of Zimbabwe issued permits to shoot elephants. The concept of property rights explains this seeming contradiction. In most conservation efforts, governments ban the killing of the endangered animals. The problem is that enforcing the ban is difficult, expensive, and often ineffective. (According to the World Wildlife Federation, 20,000 elephants are killed each year, an average of 55 per day.) Since elephants are a nuisance to African villagers, the villagers often encouraged hunters and poachers to kill the “pests.” The hunters and poachers were ridding them of a dangerous nuisance. Managers of the CAMPFIRE program, with the villagers, determined the optimal elephant population that would achieve the proper balance between humans and wildlife on the scarce land. (The elephants were not consulted.) Once that balance was determined, permits were sold by the government to hunt the “excess” elephants. Permits sold for approximately $10,000 per elephant. A large percentage of the funds went back to the villages, and villagers were compensated for crop loss caused by elephants. Villagers acquired the property rights to the elephants. Poachers without permits caused a $10,000 loss to the government and the villagers. So the villagers became the enforcers. As a result, the elephant population in Zimbabwe has increased. Property rights preserve and improve resources.
Bottom Line: Property rights are incentives to conserve and preserve resources.
The Tragedy of the Commons states that a resource with no property rights will be overused.
1. From an economist’s perspective, you can’t do anything about your neighbor’s barking dogs because:
a. The dogs are too disruptive to control.
b. The dogs bite.
c. You don’t own the property rights to the dogs.
d. The neighbor doesn’t care about his dogs or you.
2. In the mid nineteenth century, beavers came close to extinction as hunters pursued them for profit. This is an example of:
a. The marginal principle
b. The principle of exchange
c. The Tragedy of the Commons
d. All of the above
3. If I were on the hunt for used gum, where would I be likely to find it?
a. Under the desks of schools
b. On public sidewalks
c. Under the tables in fast food restaurants
d. All of the above
4. If I were on the hunt for used gum, where would I be LEAST likely to find it?
a. Under the desks of schools
b. Under the tables in fast food restaurants
c. Under students’ desks at home
d. Under public park benches