Lesson's in Microeconomics

3 weeks ago

🚗 How did a law mandating seat belts in all new cars in the US 60 yrs ago fail to improve road safety? And what's its connection to Economics 101⁉ 

It's 1965, and Ralph Nader’s book 'Unsafe at Any Speed' had stirred much widespread concern over auto safety. In response, Congress passed laws requiring seat belts as standard equipment in new cars.

📌 Seems like the right move, doesn't it? Yes / No...Let's dive deeper.

In 1975, the economist Sam Peltzman conducted a study on this law, revealing minimal improvement in overall road safety. Surprisingly, these laws gave rise not only to fewer deaths per accident but also to more accidents!!

🚫 The net result was little change in driver deaths and an increase in pedestrian deaths.

But Why? Let's dig into a bit of of Economics for this👇 

One of Gregory Mankiw's 10 principles of Economics states : 

▶ Principle 4: People Respond to Incentives

An incentive is something that induces a person to act, such as the prospect of a punishment or reward.

📈 How does this apply?

For instance, a tax on gasoline, for instance, encourages people to drive more fuel-efficient cars and shift to electric ones. That is one reason many people drive electric cars in Norway, where gas taxes are high, and why big SUVs are so popular in the United States, where gas taxes are low. 

In essence, incentives drive people to engage in certain behaviors.

➡Now, how does this relate to the road safety?? 

Consider the seat belt law: The direct effect is obvious -> When a person wears a seat belt, the likelihood of surviving an auto accident rises. 

But, the law also affects behavior by altering incentives. 👇

1. What they missed is also the speed and care with which drivers operate their cars. Now, driving slowly and carefully is costly - because it uses the driver’s time and energy.

So, drivers factor in the risk of accidents when deciding how fast or carefully to drive. For e.g., when road conditions are icy, people drive more attentively and at lower speeds.

2. This also affected pedestrians, who are more likely to be in an accident but (unlike drivers) don’t benefit from added protection.

💡 Here's the crux: The seat belt law altered a driver’s cost–benefit analysis.

Buckling up makes accidents less costly by reducing the risk of injury or death. It felt is as if road conditions had improved.

This is also famously known the Peltzman Effect⚠ 

-> When safety measures are implemented, people's risk perception decreases, and so people may make riskier decisions.

🔚 Gonna make it a point before kicking a football next time, might never know who it hits (could be my GF's father) 

Reality is, we not only need to consider the direct effects but also the indirect effects that work through incentives.