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The Cost of Seat Belts

Nov 6, 2011 • Behavioral Economics, Regulation, Thinking Economically • 197 Views    No Comments

Can we assume that seat belts make us safer? Maybe. Writing about seat belts in 1975, University of Chicago economist Sam Peltzman described what we now call the Peltzman Effect.

Sam Peltzman said that yes, seat belts do make us safer. However, making us safer has an unintended consequence. Because seat belts protect us, we might drive more dangerously. As Peltzman describes it, when regulation changes incentives, people’s response can offset the intent of the regulation.

Since the Peltzman Effect was first proposed, researchers have explored its broader implications. The availability of flood insurance can encourage people to build waterfront homes. Taking Lipitor might increase the amount of cheese and steak that we consume. And today, the Peltzman Effect is cited when financial reform is discussed. Doesn’t it make you think about “Too big to fail”?

The Economic Lesson

In economic terms, seat belts lower the cost of dangerous driving. Thinking of the law of demand, lower cost creates an increase in quantity demanded. If the cost of  dangerous driving drops, some people will accept the risk more readily. 

An Economic Question: Using supply and demand, how might you graph the impact of seat belts on safe driving?

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