When considering economic policies, it is important to look not only in the intended effects, but also to anticipate the unintended ones if one is to evaluate the true costs and benefits of a program.
Let’s consider a couple of examples that illustrate the potential importance of secondary effects. In an effort to reduce gasoline consumption, the federal government mandates that automobiles be more fuel efficient. Is this regulation a sound policy? It may be, but when evaluating the policy’s overall impact, one should look at the unintended secondary effects.
To achieve the higher fuel efficiency, auto manufacturers reduced the size and weight of vehicles. As a result, there are more highway deaths— about 2,500 more per year—than would otherwise occur because these lighter cars do not offer as much protection for occupants. Furthermore, because the higher mileage standards for cars and light weight trucks make driving cheaper, people tend to drive more than they otherwise would. This increases congestion and results in a smaller reduction in gasoline consumption than was intended by the regulation. Once you consider the secondary effects, the fuel efficiency regulations are much less beneficial than they might first appear.
To give another example of unintended consequences, watch as Russ Roberts explains how setting minimum wages has unintended consequences. Roberts points out that less than five percent of workers are paid minimum wages. Why is that? Good workers make more because employers have to pay them more to reward and keep them for being productive. If not, the worker will go elsewhere.
- What were the intended effects of requiring better gas mileage?
- What are some unintended effects?
- How do the unintended effects change your perception of the total benefits?
- The decision to raise the minimum wage is usually argued as a way to benefit the poor. If raising the minimum wage causes people to lose jobs, however, is it still worth it?
- What costs does higher unemployment impose on the workers who lose their jobs? What about on society?
This reading is an excerpt from Certell’s Common Sense Economics eBook. Certell offers curriculum materials and eBooks free of charge for students and teachers. Click Here to download the Common Sense Economics Materials.