The Power of Incentives

After reading the “Armchair Economist” By Steven E. Landsburg I learnt that arguably the most fundamental statement within economics is that “people respond to incentives”. When I first read this it occurred to me that this statement was simply obvious, yet after reading onwards it seemed I underestimated the power of incentives.

For example in 1965, Ralph Nader published a book called “Unsafe at Any Speed”, which shed light on the multiple design models of cars which made driving more dangerous. The government then issued an automobile safety legislation which made wearing seatbelts and having padded dashboards etc. a compulsory course to be taken when a person drives. Surely if a car is more safely protected from accidents the number of accidents would decrease? Yet looking at the situation in an economist’s perspective the consequence could have been easily predicted. Indeed, the number of car accidents increased. The logic behind this is that when someone is put in a dangerous situation, for example using a car model which may result in accidents, their “safety” is an incentive to drive carefully. Yet a driver who is wearing a seatbelt and has a padded dashboard thinks that driving is safer and in turn will drive less carefully. Therefore people respond to incentives and thus the amount of accidents increased.

Yet it is a bizarre concept to try to understand, because why would people choose to drive recklessly because this certainly does not present a “good” outcome as it will lead to accidents. However people will choose to work slightly longer hours if it means that they receive a more generous pay and so therefore is a “good” outcome. But speed and recklessness are good due to the fact that humans seem to want them.

But ultimately what was the effect on driving accident rates in the 1960s? Well, the regulations tend to reduce the number of driver deaths by making it easier to survive an accident. However the regulations also tended to increase the number of deaths as people drove with less care. Looking at the raw statistics, it was found out by Sam Peltzman that the two effects were of equal size. There were more driving accidents, yet less deaths per car within a given accident. So they cancelled out and the rates essentially remained the same. However there was an increase in pedestrian deaths because safety measures within cars do not protect those on the streets.

When I first read this example, I was shocked at the fact that simply because ones car is safer it would in turn lead to them driving recklessly. However I considered the proposition that people would drive more carefully if they were put in a dangerous situation which is just the opposite of saying the same preposition. In fact, there was an extreme example whereby a man named Armen Alchian sought to decrease driving accidents by mounting a spear on every steering wheel which pointed at the driver’s heart! Of course this ruling would never be passed yet it does seem to follow the same logic in an economist’s perspective. Therefore it has been tested and proven that incentives are powerful.

By Shermeen 6J

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