Eagle Forum Legislative Alerts

Friday, November 30, 2012

The cobra effect

Freakonomics Radio Podcast gives a lesson on incentives:
So the “cobra effect” refers to a scheme in colonial India where the British governor, or whoever, the person in charge in Delhi, wanted to rid Delhi of cobras. Apparently in his opinion there were too many cobras in Delhi. So he had the bounty placed on cobras. And he expected this would solve the problem. But the population in Delhi, at least some of it, responded by farming cobras. And all of a sudden the administration was getting too many cobra skins. And they decided the scheme wasn’t as smart as initially it appeared and they rescinded the scheme. But by then the cobra farmers had this little population of cobras to deal with. And what do you do if there’s no market? You just release them. And so this significantly, by a few orders of magnitude, worsened the cobra menace in Delhi. ...

LEVITT: Well I think you start by admitting to yourself that no individual, no government, is ever going to be as smart as the people who are scheming against you. So when you introduce an incentive scheme, you have to just admit to yourself that no matter how clever you think you are, there’s a pretty good chance that someone far more clever than yourself will figure out a way to beat the incentive scheme.
Levitt is an economics professor, and many of his lessons can be summarized by simply saying that people respond to incentives.

Ronald Reagan reportedly said, “If you want more of something, subsidize it; if you want less of something, tax it.” (I do not have a reliable source on this, but I am pretty sure he said similar things.)

Sometimes this is called the law of unintended consequences.

For example, extending unemployment benefits will also extend unemployment. If you pay people not to work, then people will respond to that incentive, and work less.

The Democrats saw very clearly where they got the votes to win the last election for Barack Obama. They therefore have incentives to enact policies that increase the demographic groups voting Democrat. It will surely happen.

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