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Unintended Consequences:
How regulation influences behaviour


Professor: Dr. Christopher Coyne
Live Discussion: July 23, 2009 11:00 AM PST
Submit Your Questions or Comments To The Professor
Unintended consequences are the results of an action that differ from the expected outcome. As the name implies, these consequences are not the intended outcome of the action taken. Unintended consequences can be either positive or negative.

A positive unintended consequence is an unanticipated benefit that emerges from an action. Adam Smith’s notion of the “invisible hand” is one example of a positive unintended consequence. Smith famously argued that each individual pursuing his own ends generates widespread benefits beyond that individual. For example, the butcher does not provide beef out of benevolence, but in order to make profit. However, in pursuing his own self-interest, the butcher generates unintended benefits for numerous consumers who now have access to his product.

Given that positive unintended consequences often emerge from individuals actions, emphasis should be placed on allowing individuals the freedom to act and interact. As individuals discover and pursue opportunities to better their own situation, they will also inadvertently contribute to improving the well-being of others. This process can only take place within an environment characterized by private property and individual freedom, where individuals have an incentive to experiment and act entrepreneurially.

Unintended consequences can also be negative. Negative unintended consequences often emerge when a simple regulation is imposed on a complex system. Regulations are relatively simple because regulators cannot possess all of the relevant knowledge regarding the workings of the complex institutions that underpin economic and social interaction. Because of their simplicity, regulations often change the incentives individuals face, resulting in unforeseen consequences.

Seat belt laws provide one example of unintended consequences arising from regulation. Economist Sam Peltzman analyzed the effects of mandatory seat belt laws in the United States. Regulators believed that requiring drivers to wear seat belts would reduce the number of automobile related fatalities. Surprisingly, Peltzman found that there was no change in auto-related deaths. The reason was that seat belt laws changed the incentives drivers faced. The perceived safety provided by the seat belt reduced the cost of driving recklessly, so more drivers operated their vehicles in a dangerous manner. The increase in reckless driving not only increased the danger for other drivers, but also for pedestrians and cyclists. Indeed, there was an increase in pedestrian and cyclist deaths after seat belt laws were passed. Overall, Peltzman found that while seat belts might have saved lives in a given accident, the total number of automobile-related fatalities did not change.

This finding is known as the “Peltzman Effect”—the tendency of individuals to respond to safety regulations by engaging in more dangerous behaviour. An explanation for this tendency is that people have a desired level of risk when it comes to driving (and other activities) and will change their behaviour as regulations change. The Peltzman Effect was confirmed in a recent study by economists Russell Sobel and Todd Nesbit, who found that increased safety regulations by the National Association for Stock Car Auto Racing (NASCAR) led to more accidents due to riskier driving.
Fuel efficiency regulations provide another example of negative unintended consequences. At first look, increased fuel efficiency appears desirable because of the associated reductions in fuel consumption. However, in order to increase fuel efficiency, automobile manufacturers tend to reduce the size and weight of automobiles. While accomplishing the goal of increasing fuel efficiency, smaller and lighter vehicles also offer drivers and passengers less protection. The result has been an increase in the number of automobile-related deaths. A study by economists Robert Crandall and John Graham found that fuel efficiency standards result in between 2,000 to 4,000 additional car occupant deaths each year. Another unintended consequence of increased fuel efficiency is that the cost of driving has fallen because drivers can now get more miles per gallon of gasoline. As such, these regulations may actually result in more driving, leading to more congestion and accidents.

Negative unintended consequences can arise from all types of policy and regulation, domestic and international. For example, government efforts to manipulate international trade through tariffs, quotas, and other controls can generate perverse outcomes. While trade restrictions may protect members of a specific industry, they also raise the price of goods for consumers and “downstream” producers who use those goods as inputs in their products.

The US sugar industry provides an example of such consequences. The US government has put a variety of controls (i.e., price supports, tariffs, and quotas) on international sugar trade to protect the US sugar industry. As a result, the domestic price of sugar is artificially high, and this has harmed other US industries. For example, a 2006 report by the US Department of Commerce found that the high price of sugar was driving US food and candy manufacturers to reduce their workforces and, in some cases, relocate abroad. Because sugar was a significant input for these producers, the artificially high price of sugar increased the costs of production. In the end, the regulations that were intended to protect members of the US sugar industry actually harmed producers and those employed in other industries.

Recognizing the possibility of negative unintended consequences, regulators must appreciate the role that incentives play in directing individuals’ actions. Even regulations motivated by the best of intentions can have perverse secondary effects that generate significant costs. The possibility of negative unintended consequences does not, by itself, mean that regulators should never intervene. However, it does mean that regulators should be extremely humble in both their decision to intervene and in the design of their regulations. Given the complexity of our social and economic systems, negative unintended consequences are likely to emerge and to be significant.

Suggestions for further reading
Bastiat, Frederic (1850). What is Seen and What is Not Seen. Library of Economics and Liberty. <http://www.econlib.org/library/Bastiat/BasEss1.html>.

Crandall, Robert, and John Graham (1989). The Effect of Fuel Economy Standards on Automobile Safety. Journal of Law and Economics 32, 1: 97–118.

Merton, Robert K (1936). The Unanticipated Consequences of Purposive Social Action. American Sociological Review 1, 6: 894–904.

Peltzman, Sam (1975). The Effects of Automobile Safety Regulation. Journal of Political Economy 83, 4: 677–725.

Sobel, Russell S., and Todd M. Nesbit (2007). Automobile Safety and the Incentive to Drive Recklessly: Evidence from NASCAR. Southern Economic Journal 74, 1: 71–84.

US Department of Commerce (2006). Employment Changes in US Food Manufacturing: The Impact of Sugar Prices. <http://www.ita.doc.gov/media/Publications/pdf/sugar06.pdf>. 


Join us for a live discussion of this topic with the Professor on Thursday, July 23rd at 11 am (Pacific). Post your comment or question now to get in the queue, and it will appear during the live chat when Coyne responds. You can even post a follow-up question or comment during the real-time discussion to contribute to the live chat!
 

Questions & Comments

Courtenay email -

Hey everyone! Go ahead and get your UNINTENDED CONSEQUENCES questions in the line-up. They will appear along with Dr. Coyne's answers during the live discussion.

Courtenay email -

Welcome to Ask the Professor! We are pleased to have with us Dr. Christopher Coyne from the West Virginia University. Please remember to refresh your browser regularly to see the new comments.

Luis A. Berlanga-Albrecht email - www.economia.unam.mx

The act of forcing out a dialogue among different abilities, even opposite ones, to think about on what safe grounds the construction of a society should been supported has a long tradition in the occidental way of thinking.

This tradition was first cut by the 17th-century western philosopher Baruch Spinoza in his "Theologico-Political Treatise", first published anonymously in 1670. In this work Spinoza’s statement is that all "revealed" religion had to be analyzed on the basis of reason, not simply blind faith.

By rejecting the “Providence” as the only explanation of human accounts, Spinoza opened us a door for the understanding of the causes of human social interaction, the same door that is closed now when an “invisible hand” is putted forward permanently in economic education.

In our current era in which both the astrophysics laws of Newton and the microphysics have been found as relative thanks to the genius of Einstein in the former case and due to quantum mechanics in the latter, the free exchange of ideas is defenestrated when any position is defended with aspirations of definitiveness, with a spirit of a final reality (things use to get worse when an attitude of arrogance is added).

In order to build up a good balance for discussion, I would like to ask you for examples of negative unintended consequences of the "invisible hand".

Respectfully yours.

Dr. Coyne writes:

Hi Luis,

Thank you for your question. Examples of negative unintended consequences associated with the ‘invisible hand’ would be ‘negative externalities.’ Negative externalities occur when costs spill over onto people outside the transaction/interaction. Pollution is a typical example of a negative externality. One potential solution is establishing/clarifying property rights so that people internalize the full costs of their behaviors. Another solution is regulation through taxation or quotas. However, we must be cognizant of the potential of the negative unintended consequences associated with such taxes and r

Luis A. Berlanga-Albrecht email -

Luis A. Berlanga-Albrecht

The act of forcing out a dialogue among different abilities, even opposite ones, to think about on what safe grounds the construction of a society should been supported has a long tradition in the occidental way of thinking. This tradition was first cut by the 17th-century western philosopher Baruch Spinoza in his "Theologico-Political Treatise", first published anonymously in 1670. In this work Spinoza's statement is that all "revealed" religion had to be analyzed on the basis of reason, not simply blind faith. By rejecting the "Providence" as the only explanation of human accounts, Spinoza opened us a door for the understanding of the causes of human social interaction, the same door that is closed now when an "invisible hand" is putted forward permanently in economic education. In our current era in which both the astrophysics laws of Newton and the microphysics have been found as relative thanks to the genius of Einstein in the former case and due to quantum mechanics in the latter, the free exchange of ideas is defenestrated when any position is defended with aspirations of definitiveness, with a spirit of a final reality (things use to get worse when an attitude of arrogance is added). In order to build up a good balance for discussion, I would like to ask you for examples of negative unintended consequences of the "invisible hand". Respectfully yours.

Dr. Coyne writes: Hi Luis,

Thank you for your question. Examples of negative unintended consequences associated with the ‘invisible hand’ would be ‘negative externalities.’ Negative externalities occur when costs spill over onto people outside the transaction/interaction. Pollution is a typical example of a negative externality. One potential solution is establishing/clarifying property rights so that people internalize the full costs of their behaviors. Another solution is regulation through taxation or quotas. However, we must be cognizant of the potential of the negative unintended consequences associated with such

Edward Podritske email -

Could you comment on how the merging of the disciplines of politics and economics leaves discretionary power in the hands of a few politicians and/or bureaucrats, leaving large segments of the population at the mercy of their failure to consider the unintended consequences of their economic policies and legislative decrees? And, how can this longstanding tendency best be curtailed in the future?

Dr. Coyne writes: Dear Edward,

You raise an important issue. Good economics does not equal good politics. This means that what gets politicians elected does not necessarily contribute to ‘good’ economic outcomes. You are correct to point out that when control is in the hands of politicians and/or bureaucrats we should expect the persistence of negative unintended consequences. Ultimately, it is an issue of feedback mechanisms.

Errors and mistakes occur all the time so what is important are the presence or absence of mechanisms that allow people to recognize and correct those mistakes. In markets we have the profits/losses mechanism to guide the error correction process. Profit/loss is absent in politics and voting is a weak constraint on behavior.

As for curtailing the persistence of negative unintended consequences in politics, the solution lies in constraints on the behavior of politicians and bureaucrats. Nobel Laureate economist James Buchanan emphasized the importance of constitutional constraints which, ideally, would align the interests of those in the public sector with private citizens. Of course this is an ideal, but it is a good goal to strive for.

If you are interested in this, I suggest Buchanan’s book, The Reason of Rules.

Chris

Alex email -

What are the potential unintended consequences of government control of health care? Could this lead to more waste and inefficiency?

Dr. Coyne writes:

Dear Alex,

Thank you for your question. This is a complex question but let my try my best to provide an answer. First off, I can’t comment directly on the current movement in the U.S. since, to be honest, I don’t really understand the details of the bills being proposed. One could envision both positive and negative consequences of government control of healthcare. In theory, government control can provide better and cheaper healthcare to citizens—this would be a positive outcome.

At the same time, we have good reason to expect there will be negative unintended consequences to increased government control (note that in the U.S., the government controls—directly and indirectly—much of our health care system). The proposed healthcare bills are over 1,000 pages and will create a massive bureaucracy (here is an org chart:

http://www.newmajority.com/the-baffling-bureaucracy-in-the-dems-health-care-plan/)

and numerous regulations. These regulations will shift the incentives of both private citizens, public officials, as well as those in the medical industry (insurance, physicians, etc.). I imagine the biggest issue will be rationing the scarce resources associated with medical care.

As a rule of thumb, the more complex the regulation the more likely there will be negative unintended consequences. Very few people, including the politicians voting on the bills, have actually read the 1,000+ pages of the proposed health care bills so we should have little faith that they have even a basic understanding of potential negative unintended consequences.

QuestionAsker email -

The study you cite -- Crandall and Graham -- is now 20 years old. Car engineering has improved greatly since then. Smaller cars, like the Smart Car, pass tough safety regulations, even though they are tiny. Do fuel efficiency standards still result in between 2,000 to 4,000 additional car occupant deaths each year? Do you have up-to-date data on this?

Dr. Coyne writes:

Dear QuestionAsker,

I am not aware of an updated version of the Crandall and Graham study.

It is true that care engineering has improved so an updated study would be interesting. All I can say is that if I were in an accident a Smart Car would be one of the last things I would want to be driving—slightly ahead of a motorcycle or bicycle.

Chris

Courtenay email -

Great questions so far everyone! We've got only ten minutes left, so please get your last questions in...

Katerina email -

Dr. Coyne, There is a big push for "going green" in the U.S. How will this environmental focus affect us in terms of unintended consequences? Some political pundits have said that we will be less competitive with other nations due to the potentially higher production costs. How can economists encourage citizens and politicians to consider unintended consequences of the green efforts, especially since there is still debate in the scientific community about how much our actions may or may not affect the environment?

Dr. Coyne writes:

Dear Katerina,

Thank you for your question. Climate change and the ‘green’ movement is a complex topic. I am going to avoid commenting directly on the scientific debate regarding climate change. However, the concept of unintended consequences is central to the environmental debate.

Like health care, in theory, the government can improve the environment through a variety of tools (regulation, taxes, caps, etc.). As I mentioned in an earlier response, the concept of negative externalities is important here. Many argue that the government has an important role to play in ensuring externalities are internalized.

At the same time, negative unintended consequences are important to consider. Let me provide a simple example. Most kids are taught that recycling ‘saves trees.’ On the face of it this seems to make sense.

If we recycle paper fewer trees will be cut down. Unfortunately, this shows a lack of understanding of basic economics. In reality, supply meets demand. Most people don’t realize that a large majority of trees are planted by tree farmers for the purpose of making paper products.

If we recycle paper it is true that fewer trees will be cut down.

However, this means that tree farmers will plant fewer trees. The main takeaway is that if you want more trees you shouldn’t recycle paper!

The more general lesson is that environmental initiatives based on the best of intentions often lead to perverse outcomes due to negative unintended consequences.

Ch

Scott Weldon email -

Can you outline exactly how it would be possible to align the interests of those in the public sector with private citizens? It seems to be the same principal-agent problem that many businesses face and fix with carefully selected incentives - how can you remove the incentive of politicians to maximize their votes by appealing to interest groups? Thanks.

Dr. Coyne writes:

Hi Scott,

F.A. Hayek provided some insight into your question (see Hayek’s _The Constitution of Liberty_ and his 3 volume _Law, Legislations, and Liberty_ for more).

1. Generality— Hayek argued that rules should be general since they refer to situations that cannot be known in the present. Further, rules should not refer to particular places, persons or object (note that this would help with special interest group issue).

2. Laws should be prospective and not retrospective.

3. Laws must be public, understandable and predictable—laws must be understandable to citizens so that they have a stable framework to act within (note this would force lawmakers to make laws clear and transparent).

4. Equality— Hayek argued that the law should apply to everyone equally.

There should be no distinction based on class. Further, government officials should not be able to make themselves exempt from the law.

These are just some general guidelines and there is a lot more involved with each one. But hopefully they give you insight into some potential solutions to the problem you raise. If you are interested in this I suggest you look at Hayek’s books as well as the collected works of James Buchanan.

Chris

Courtenay email -

Thanks again to Dr. Coyne for the very interesting discussion today. Next time we'll be discussing Why Socialism Fails with Professor Steven Horwitz of St. Lawrence University on Thursday, August 27th at 11:00 am PST.

See you there!

 
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Dr. Christopher Coyne is an Assistant Professor of Economics at West Virginia University. He is also the North American Editor of The Review of Austrian Economics and a Research Fellow at the Mercatus Center. In 2008, he was named the Hayek Fellow at the London School of Economics. Prior to moving to West Virginia University in 2007, Coyne was an Assistant Professor of Economics at Hampden-Sydney College.