Good Intentions, Bad Policy

New York Times: Good Intentions, Bad Policy

Perhaps the single most important policy-related insight in economics is that changes in policies lead to behavioral responses. More generous unemployment insurance leads to longer spells of unemployment; implicit government guarantees of financial institutions lead to too much risk-taking. Well-designed policies, like a congestion tax or carbon tax, can reduce social problems by getting the right sort of behavioral response; interventions that create an offsetting behavioral response can push the world in the wrong direction.

That insight is associated, above all, with the great English economist William Stanley Jevons, who started worrying about energy conservation 150 years ago.

The Jevons Paradox tells us that improvements in fuel efficiency can lead to more consumption of fuel, and its logic goes beyond tougher vehicle-emissions standards. It also suggests that low-tar cigarettes can increase the prevalence of lung cancer and that low-calorie snacks might actually make people fatter.

Of course, the Jevons Paradox is not some immutable law; more fuel-efficient cars can and do typically lead to less energy use. But Jevons’s warning should always be heeded: Well-meaning policies can easily create the wrong sort of behavioral response. …

…

What was causing the exhaustion of Britain’s coal supplies, and what was to be done about it?

Britain’s 19^th century coal conservationists seem to have been quite enthusiastic about more fuel-efficient engines: “It is very commonly urged that the failing supply of coal will be met by new modes of using it efficiently and economically.” Jevons throws cold water on this optimistic notion: “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”

As he explains:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognized in many parallel instances. The economy of labor effected by the introduction of new machinery throws laborers out of employment for the moment. But such is the increased demand for the cheapened products that eventually the sphere of employment is greatly widened.

Jevons supports his argument with evidence documenting that coal usage soared just as engines were becoming more efficient.

The key condition for the Jevons Paradox to operate is that the demand for the thing in question (power, vehicle miles, tasty cookies, cigarettes) has to be sufficiently  elastic with respect to the thing’s price. In the case of fuel-efficient cars, the Jevons Paradox will operate only when a 10 percent reduction in the fuel cost of driving leads to a greater than 10 percent increase in the amount of driving.  A 50 percent reduction in calories per cookie lead to heavier people only if the number of cookies eaten doubles. …

… But the real point of the Jevons Paradox is not that fuel efficiency is a bad thing. It is not. More fuel-efficient cars enable people to enjoy driving more and lower-calorie cookies abet the enjoyment of eating.

The real lesson is that a change in the effective price of a commodity leads to a behavioral response, and, in some cases, that response can be so strong that it reverses the desired effect. As America considers new policies in public health, environmentalism and financial regulation, Jevons is as relevant as ever.