Peltzman Effect: Unintended Consequences of Government Intervention

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Why are expectations about the impact of government regulation so often not met? Why do the actual consequences of government interventions diverge countless times from the intentions of the politicians who promote them? Economics has elegant answers to these stimulating questions. One of them will be illustrated and explained in this article.

“Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency (…)”

So begins the brilliant economist Ludwig von Mises in his monumental book Human Action. Human action is preceded by a comparison of the costs and benefits of the intended action (whether conscious or subconscious) that would maximize the individual’s utility at a given moment, given the specific circumstances. These costs and benefits change over time, and people respond to them with their decisions. In short, people naturally respond to incentives of all kinds – this is one of the ten basic principles of economics in the world-famous textbook G. Mankiw’s Principles of Economics.

These key economic insights must be taken into account by public policymakers if they want their policies to achieve the desired results. If policymakers are oblivious to how their decisions affect people and change their behavior, they cannot be too surprised that there is a noticeable gap between the original intentions of these state interventions and their results.

Economists often use public policy on car safety as an example of such unintended consequences. Let us therefore continue this tradition and consider what will happen to road safety if one law requires car manufacturers to fit seat belts to their vehicles and another requires individual drivers to wear seat belts at all times when driving. “A trivial question”, you might say. “After all, when a passenger is properly restrained in his seat, his safety is demonstrably increased and, with it, the safety of other road users” – you could go on.

Unfortunately, it is not that simple. The economist Sam Peltzman has shown in his famous article that this feeling of greater safety makes us less responsible, and thus its initial beneficial impact is dearly bought. But what exactly are the negative consequences of this measure?

A rational person behind the wheel weighs up how careful his driving will be based on the marginal utility of slower driving compared to the marginal cost it imposes (e.g. more time spent driving that cannot be used for other activities). Seat belt laws change the incentives by making slow driving less attractive, since the additional acceleration that – all other things being equal – increases the risk of an accident is no longer as dangerous in the eyes of the driver, who believes that the seat belt protects him from a fatality.

So what will this measure bring in summary? To put it as briefly as possible – a higher probability of accidents. You could argue, however, that at least car crashes will not be fatal in the sense that passengers will mostly survive. You are right, but at that point the aggregate result is unclear – on the one hand, there are more accidents, but on the other hand, the likelihood of death due to seat belts is lower.

But be warned, there is another important aspect that has not yet been described! Drivers are not only endangered by distracted driving. It also has an undeniable adverse effect on pedestrians, who are not and cannot in principle be protected against collisions with vehicles in the same way as drivers are by seat belts.

Sam Peltzman has documented that in the United States, where he conducted his research into the unintended consequences of this public policy, there was both an increase in the number of traffic accidents (but, let us add, a reduction in the likelihood of a fatal crash so that the change in driver fatalities was quite small) and an increase in the number of pedestrians killed after being hit by a car. Overall, the law caused more road user deaths. Quite unexpected, right?

The example we have used proves one thing – government regulations and all other interventions in the market economy must not be judged by the intentions that justify them. These may be as benevolent as they are, but the real negative consequences may outweigh any good that was originally intended.

Economist Ryan Bourne, in his book Economics in One Virus, writes:

“The lesson we should take away from Peltzman’s work is that, in designing regulatory measures, we must always keep in mind that we are applying these rules to human beings.”

The SARS-CoV-2 pandemic, the economic context discussed in this publication, and the various government regulations associated with it, provided illustrative examples of the Peltzman effect.

Written by Štěpán Drábek – analyst at CETA.

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