An Economics Idea ToolKit Would Contain Unintended Consequences

An Economics Tool Kit: Unintended Consequences

Oct 19, 2012 • 406 Views
EST. TIME TO READ: 3 minutes

Next to “no free lunch,” perhaps the most important idea in an economics tool kit is “unintended consequences.”

Our story starts in Bogota, Colombia and a visiting professor who tells the Freakonomics people that his friends picked him up with a different car each day. Why? To minimize pollution, the government mandated that car owners could not drive daily. The check-up system? Your license plate. So, many of those who drove daily just used a different car that had a different plate. Less pollution? Not at all. In fact, because those additional cars were old, there was more pollution.

Our next stop is Mexico and a story we have already told. To elevate air quality there, people were encouraged to upgrade refrigerators to newer, more energy efficient models. What happened? Cheaper electric bills let them use their appliances even more.

And this takes us to Cash For Clunkers (aka CARS: Cars Allowance Rebate System, 2009). The source of the idea, Princeton professor Alan Blinder said it would be “trifecta” legislation. By giving a $3500 or $4500 rebate to people who traded old less energy efficient vehicles for newer ones…

  • you helped the auto industry through new car purchases
  • you helped the environment with elevated mpg requirements
  • you helped the poor by making new cars cheaper.

What happened? The program was so popular that Congress had to add $2 billion because they ran out of rebate money.

Also though,…

  • After a massive sales burst during the 2 months of the program, purchases plummeted. The program’s incentives time shifted sales decisions.
  • The environmental perk did not materialize. Pick-up truck owners did not buy Priuses. Instead, they traded old gas-guzzling pick-ups for newer, lower gas guzzling trucks. In addition, fuel efficiency can lead to more driving and ultimately, any diminished emissions were a tiny proportion of the US total.
  • And finally, lower income individuals might not have benefited because the older cars they could have afforded were traded in and destroyed. Fewer used cars meant less supply and a supply curve shifting to the left. Used car prices increased.

 

In Colombia, in Mexico, in the US, legislators had rational, valid objectives. But the consequences were unintended.

How can government get the best out of us? Your answers?

Sources and Resources: My reading for today was fascinating. I returned to the Michael Grabell book, Money Well Spent? and his chapter, “Cash For Clunkers.” More scholarly but very readable, a paper on the impact of Cash For Clunkers, written by economists Atif R. Mian (Princeton) and Amir Sufi (University of Chicago) was excellent. I got the idea for the post and my information on Colombia from this Freakonomics podcast and Alan Blinder suggests Cash For Clunkers (as “the best stimulus idea you’ve never heard of”) in 2008, here, in the NY Times.

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