PEOPLE RESPOND TO INCENTIVES.

It is useful, dear reader, to understand that even people confronting choices ("forced to choose" in bleeding-heart-liberal lingo) that aren't that great still have the opportunity to make choices, and substitutions.

Perhaps the end of the academic year is not the best time to unleash a series of posts on the essential elements of economics, but then, the end of the academic year might be the best time for still-active academicians to write think pieces as procrastination brain clearing whilst grading finals.  So might it be with Donald "Cafe Hayek" Boudreaux in "Substitution Effects and Steering-Wheel Daggers."  It's a provocative title, yes, and yet it's a lesson worth repeating.

Substitution effects are more subtle, although hardly difficult to grasp. These effects are those caused by changes in the relative attractiveness of different options. If the price of gummy bears rises while that of M&Ms doesn’t change, candy buyers — including seven-year-olds — will purchase fewer gummy bears and, quite likely, more M&Ms. This change in relative prices causes consumers to substitute out of gummy bears and into M&Ms.

The amount of M&Ms people seek to purchase, therefore, isn’t determined only by people’s incomes; It’s determined also by the ease or difficulty of obtaining other goods and services that are related, in consumers’ minds, to M&Ms. Change the availability of gummy bears and you change consumers’ interest in buying M&Ms even without changing consumers’ income. Likewise, change the popularity of Halloween and you also change the demand for M&Ms.

Most commentary on public policy by competent economists focuses on substitution effects. The reason is not that income effects aren’t real or that economists think these to be less important than substitution effects. The reason is that the general public, including politicians, naturally understand income effects but seem unaware of substitution effects. It’s left to economists to explain the reality of these effects. Tracing out substitution effects is one of the great services performed for the public by competent economists.

That sensitivity to the effects of incentives leads to all sorts of provocative observations.  "The more restrictive is the occupational licensing of electricians, the greater is the incidence of accidental electrocution."  That's a point frequently made by professionals in their advertisements.  Do you really want to fix that garbage disposal yourself?  Do you really want to replace those windows yourself?  Yes, you want those contractors to be competent, and perhaps occupational licensing offers additional protection at the margin, but enough so relative to market competition and word of mouth to distinguish the reputable from the disreputable?

Homeowners and small-businesspeople in strict-requirement states are thus more likely than are their counterparts in states with less-strict requirements to substitute either into do-it-yourself electrical work or into sticking longer with older electrical wiring — and, therefore, raise the risk of accidental electrocutions.

The article goes on to illustrate other substitutions people can make at the margin.  Consider, for instance, why mandating infants be strapped into seats on airplanes leads to more infants killed in traffic accidents.  Or why an Environmental Protection Agency ukase banning new internal combustion cars leads to more upkeep and maintenance of older guzzlers, rather than to those purchases of enclosed golf carts Our Political Masters would like to nudge us to make.

And, as clever as North American driveway mechanics are at keeping older cars working, the knock-on effects of older, less reliable, more polluting cars staying on the road longer might include more pollutants emitted and more motorists killed in crashes.  I mean, it might be that Iranian helicopter mechanics are vetted for their Faith, but their complaints about a helicopter parts embargo might have something to do with it.  And I wouldn't put it past the Jarrett regency to ban the production of aftermarket parts for older automobiles, that is, if they don't opt to force the original equipment manufacturers to keep them in production first. (With technocrats, who knows?)  Not, if you're sensitive to incentives, that either policy will have much effect.  It's always possible to scavenge in wrecking yards.