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Unintended Consequences: Cholesterol, Cars and Unemployment

May 3, 2013 • Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Innovation, Labor, Money and Monetary Policy, Uncategorized • 107 Views    No Comments

Statins, seat belts and unemployment benefits reduce some of life’s risks. Yes?

Not always…

Told that statin medication would diminish high cholesterol, some people eat more cheese, more ice cream, more steak. The result? Less healthy diets.

Knowing that seat belts increase auto safety, certain drivers become more reckless because there is less of a chance of dying in an accident. The result? An increase in pedestrian fatalities.

Designed as a cushion for those without jobs, unemployment insurance makes joblessness less risky. Economists have observed though, that when employers know workers have an alternative, they are not as concerned about firing them. The result? More unemployment.

A University of Chicago economist, Sam Peltzman has hypothesized that risk diminishing regulation has unintended consequences. Called the Peltzman Effect, sometimes the new incentives created by a risk reducing rule offset its benefit. The reason is the law of demand. When the cost of risk becomes cheaper, we might be willing to accept more of it.

Sources and resources: Below is a video of Sam Peltzman at Hebrew University explaining how the Peltzman Effect relates to financial regulation. As for my three examples, the first was anecdotal, the second from Dr. Peltzman’s research and the third from an Econtalk podcast interview of  economist Casey Mulligan.

 

 

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