Unintended Consequences

by Elaine Schwartz    •    Mar 15, 2010    •    604 Views

New rules might not always have the results regulators expect.  Starting on April 29, any airplane that sits on the tarmac for longer than 3 hours will be fined up to $27,500 per passenger.  For a Boeing 737, that could mean $4 million.  Continental’s CEO responded, “Here’s what we’re going to do: We’re going to cancel the flight.” And Delta and Jet Blue, concerned about a closed runway at New York’s JFK, asked for temporary exemptions.  The goal of the rule? To help passengers.  The result? Perhaps canceled flights that do more harm than good.

Here, let’s think economically.  The primary goal of every business is to maximize profits.  If large fines seem imminent, firms will try to avoid them.  It appears that the Continental reaction is not what the DOT had in mind.  Still, we cannot be sure of the airlines’ profit maximizing response until after April 29.

The Economic Lesson

Thinking of the impact of a new rule returns us to incentives.  The incentives that new rules create will determine their success.

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