Tuesday, August 29, 2006

Tampering With The Price System

One of the most valuable gifts of economics to libertarians has been an understanding of how the price system transmits information in order to bring about efficient market outcomes. At its most basic, the theory is that people respond to the incentives (disincentives) created by higher or lower prices to change their patterns of production and consumption. In the realm of economic behaviour, while challenged from time to time by arguments relating to market failure and monopoly power, this is a fairly well held orthodoxy.

However much more controversial is whether or not the prices altered by government have an effect on social behaviour. Governments alter prices two ways: by changing the reward for producing a particular good, service or kind of behaviour; or by changing the cost a particular good, service or kind of behaviour. While central planning at the firm-level has gone out of fashion, central planning at the individual-level through welfare payments, etc. has steadily increased over the past decades.

In this light, it is fascinating to read the work of Australian economists Joshua Gans & Andrew Leigh on unusual days, which showed the way that one-off changes by government in the prices of death and birth had significant effects on social behaviour as individuals altered their choices in order to maximise their wealth (or, in the circumstance of the 1979 abolition of inheritance taxes, the wealth of their beneficiaries). In summary, Gans & Leigh found that half of those eligible to pay inheritance taxes in the week before their abolition delayed their deaths until after their abolition; and that up to 1,000 couples delayed the births of their children in order to be eligible for the baby bonus when it came into effect in 2004.

4 Comments:

At August 29, 2006 2:17 pm, Blogger Sukrit Sabhlok said...

Now this is interesting! Postponing death is probably not an easy thing to do...

There's a good historical example in economist Thomas Sowell's Basic Economics book about the power of prices as well - from memory: two armies in some ancient period of history were fighting. Army A surrounds Army B's fort. Prices for food and other necessities inside Army B's fort skyrocket.

The increased prices attract people willing to risk their lives to get through Army A's lines and get supplies to citizens of B. This enables Army B to hold out against A. But the government of B responds to the higher prices by imposing a cap for reasons of 'fairness'.

Predictably, Army B collapses as no one is willing to bring supplies into the fort at great personal risk for meagre gain.

 
At August 29, 2006 6:47 pm, Blogger skepticlawyer said...

I wonder how many people managed to postpone death using, ahem, creative accounting?

 
At August 29, 2006 10:51 pm, Blogger (post)libertarian said...

Interesting story about "creative accounting" skepticlawyer. If you could get the data sets to do this kind of research in Turkey, you would find an abnormally large number of boys born in early Jan.

Military service is organised by birth year, so by not registering the birth until the new year, parents defer their son's call up for askerlisk, (compulsory national service - essentially a form of taxation) by twelve months.

 
At August 29, 2006 11:15 pm, Blogger skepticlawyer said...

Crikey, all those Aquarians - chaos would surely ensue...

/sarc

 

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