This week I read George Stigler's An Academic Episode and Joshua Gans' The Most Unusual Day. Both readings explored the Law of Unintended Consequences. Stigler explored the unintended consequences of rules made in a university. Gans looked at the effects of a new birth law in Australia.
Stigler looked at a university in South america run by a man named Seguira. The new rules made it so grad students, associate professors, professors, and assistants could challenge each other to a test and switch jobs and salaries. This caused professors to retire, teach wrong information, and stop research. There was intense competition and rivalry and a mad rush to the library. The rules were repeatedly changed but always had negative consequences. Graduate studies almost stopped entirely. The rules were then obliterated.
Gans looked at a law made in Australia in 2004 that said any baby born after July 1st would get a $3000 bonus. The announcement was made a few months in advanced. This announcement caused birth certificates to be changed and caused all induced labor and caesareans to be virtually stopped. There was a giant overflow in the hospitals. Births were shifted. Was it worth it?
These two examples explained the Law of Unintended Consequences. Unintended things - usually bad - happened as a result of new laws.
Questions remain.
If the Australian government decided to make the announcement on July 1st and not in advance, would there still have been unintended consequences? Is this an example of when there would be no unintended consequences? I also wonder in in 2008 when the baby bonus was changed to $5000 if the unintended consequences happened again.
Also, did Seguira not realize how the new rules could not possibly end well. Did he think people would just work harder with no selfishness? Also what happened when the rules were wiped away? Was there a backlash or more unintended consequences?
Finally, is there an example of a law of unintended consequences where the consequences are good - or outweigh the negatives? We seem to look at a lot of examples of negative unintended consequences.
Saturday, October 15, 2011
My First Economics Midterm
Lat Friday I took my first economics midterm - the first midterm I have ever taken in college.
Here is the basic rundown of my schedule. I studied for the test that week. On Thursday we had the TA review session and I did not leave early and was one of twenty kids still there at the end. During this session we went over a practice test that I thought we did not have the answers to. I then went to the library until I got kicked out and then I went to bed. I took the test in an hour and then went on my fall break. I just got the results of my test yesterday.
This whole process showed several economic principles, mostly of opportunity cost. I went to the review session because I thought we didn't have the answers to the review test. I found out later in the library that we did on an audio recording and I listened to the whole thing and got all the answers. This causes me to be up later. In my opinion, I could have gotten to bed earlier had I not gone to the review session and just listened to the recording - I got the same information. The cost of going to the review session was me not studying on my own with people, me not listening to the recording until later and me going to bed late.
Now the problem with opportunity cost is that we'll never know what would have happened if I took the other option. Maybe I would have done worse on the test without the review session. Maybe I would have slept and I would have done better.
There is a point every night before a test where there is a question of opportunity cost. When does the cost of studying outweigh the cost of sleeping? The problem is, we will never know. If I chose to sleep more maybe I would do better or maybe I would do worse. If I studied more maybe I would know more, or maybe I would pass out during the test. But I will never know the outcome of taking the other choice.
Here is the basic rundown of my schedule. I studied for the test that week. On Thursday we had the TA review session and I did not leave early and was one of twenty kids still there at the end. During this session we went over a practice test that I thought we did not have the answers to. I then went to the library until I got kicked out and then I went to bed. I took the test in an hour and then went on my fall break. I just got the results of my test yesterday.
This whole process showed several economic principles, mostly of opportunity cost. I went to the review session because I thought we didn't have the answers to the review test. I found out later in the library that we did on an audio recording and I listened to the whole thing and got all the answers. This causes me to be up later. In my opinion, I could have gotten to bed earlier had I not gone to the review session and just listened to the recording - I got the same information. The cost of going to the review session was me not studying on my own with people, me not listening to the recording until later and me going to bed late.
Now the problem with opportunity cost is that we'll never know what would have happened if I took the other option. Maybe I would have done worse on the test without the review session. Maybe I would have slept and I would have done better.
There is a point every night before a test where there is a question of opportunity cost. When does the cost of studying outweigh the cost of sleeping? The problem is, we will never know. If I chose to sleep more maybe I would do better or maybe I would do worse. If I studied more maybe I would know more, or maybe I would pass out during the test. But I will never know the outcome of taking the other choice.
Class 18 - When Markets Fail...and Rizzo Sits on Students
Today we talked about the market.
We said that market transactions caused positive sum outcomes. But markets are often wrong and sometimes trade doesn't happen.
This happens when there is a lack of markets or a problem in the institutions.
When we have a lack of markets, there are usually externalities (like social norms preventing transactions), market powers (monopolies), or information problems. Rizzo proved this by politely sitting on a student and asking him to pay him to get up. Both parties would benefit from the transaction, but there was no trade - social norms prevented this.
We have problems in institutions usually with the Rule of Law. This is when legislation applies equally to everyone, the law is not arbitrary/arbitrarily enforced, and it is a general law (see titanium czar lecture). Rizzo talked about getting pulled over for speeding and when speeding is acceptable. The law can't be arbitrarily enforced.
We then talked about efficiency as producing what people want and at the lowest cost. We don't want to wast resources.
We ended the class with inflation. This is when there is a general rise in all prices. Basically there's too much money. There is the same amount of goods, but there's just more money so prices increase. There is always that famous complaining Grandpa story - "when I was a kid, candy cost 2¢." Well you know what Grandpa? You also made less in wages.
We said that market transactions caused positive sum outcomes. But markets are often wrong and sometimes trade doesn't happen.
This happens when there is a lack of markets or a problem in the institutions.
When we have a lack of markets, there are usually externalities (like social norms preventing transactions), market powers (monopolies), or information problems. Rizzo proved this by politely sitting on a student and asking him to pay him to get up. Both parties would benefit from the transaction, but there was no trade - social norms prevented this.
We have problems in institutions usually with the Rule of Law. This is when legislation applies equally to everyone, the law is not arbitrary/arbitrarily enforced, and it is a general law (see titanium czar lecture). Rizzo talked about getting pulled over for speeding and when speeding is acceptable. The law can't be arbitrarily enforced.
We then talked about efficiency as producing what people want and at the lowest cost. We don't want to wast resources.
We ended the class with inflation. This is when there is a general rise in all prices. Basically there's too much money. There is the same amount of goods, but there's just more money so prices increase. There is always that famous complaining Grandpa story - "when I was a kid, candy cost 2¢." Well you know what Grandpa? You also made less in wages.
Class 17 - Making a Deal with the Devil
Today we talked more on the Law of Unintended Consequences. This is when unintended things, usually bad, happen as a result of a law or something that was supposed to be good for society. Last post I talked about the seat belt example. Today we talked about the Endangered Species Act and how landowners who were paying the cost of the act just cleared their lands and now more animals are endangered.
Unintended consequences happen when we use simple rules to try and regulate complex systems.. We have limited information, little feedback, misleading incentives, and short time horizons.
We also talked about how when regulations push against incentives, incentives push back. For example, the Disability Act caused less disabled people to be hired because it would cost the company more.
"Sometimes the devil you know may be preferable to the devil you don't."
We ended the lecture by talking about how trade is NOT zero-sum. There is the pie fallacy - there is a fixed amount of wealth in the world.
Unintended consequences happen when we use simple rules to try and regulate complex systems.. We have limited information, little feedback, misleading incentives, and short time horizons.
We also talked about how when regulations push against incentives, incentives push back. For example, the Disability Act caused less disabled people to be hired because it would cost the company more.
"Sometimes the devil you know may be preferable to the devil you don't."
We ended the lecture by talking about how trade is NOT zero-sum. There is the pie fallacy - there is a fixed amount of wealth in the world.
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