Understanding Jevons Paradox is as critical…

Edward Glaeser of Harvard has a nice post in NYT Economix Blog.

Jevons Paradox says that certain policies which try and prevent a behavior can lead to more of that behavior.

Perhaps the single most important policy-related insight in economics is that changes in policies lead to behavioral responses. More generous unemployment insurance leads to longer spells of unemployment; implicit government guarantees of financial institutions lead to too much risk-taking. Well-designed policies, like a congestion tax or carbon tax, can reduce social problems by getting the right sort of behavioral response; interventions that create an offsetting behavioral response can push the world in the wrong direction.

That insight is associated, above all, with the great English economist William Stanley Jevons, who started worrying about energy conservation 150 years ago.

The Jevons Paradox tells us that improvements in fuel efficiency can lead to more consumption of fuel, and its logic goes beyond tougher vehicle-emissions standards. It also suggests that low-tar cigarettes can increase the prevalence of lung cancer and that low-calorie snacks might actually make people fatter.

The main idea behind Jevons Paradox is price elasticity.

The key condition for the Jevons Paradox to operate is that the demand for the thing in question (power, vehicle miles, tasty cookies, cigarettes) has to be sufficiently  elastic with respect to the thing’s price. In the case of fuel-efficient cars, the Jevons Paradox will operate only when a 10 percent reduction in the fuel cost of driving leads to a greater than 10 percent increase in the amount of driving.  A 50 percent reduction in calories per cookie lead to heavier people only if the number of cookies eaten doubles.

However, the real lesson from this is:

But the real point of the Jevons Paradox is not that fuel efficiency is a bad thing. It is not. More fuel-efficient cars enable people to enjoy driving more and lower-calorie cookies abet the enjoyment of eating.

The real lesson is that a change in the effective price of a commodity leads to a behavioral response, and, in some cases, that response can be so strong that it reverses the desired effect. As America considers new policies in public health, environmentalism and financial regulation, Jevons is as relevant as ever.

Very interesting stuff.

Economists picked Arthur Cecil Pigou for his lessons in the crisis. Then Bruce Yandle of Clemson University reminded not to misinterpret Pigou’s findings:

As strange as it may seem, Pigou did not believe that government could improve human well being by fine-tuning behavior with taxes, subsidies, and regulation. His concern was grounded in what we today call Public Choice.He did not accept the notion that politicians, given constitutional constraints, would be capable of implementing an efficient and effective set of taxes and subsidies. Put simply, he did not believe the politicians could get the calculations right. Instead ofmaking things better, the chances were just as good that things would be made worse. Instead of keeping faith with implementing a welldesigned tax, the politicians’ interest for favored interest groups and finding ways to generate evermore revenue.

It would seem that Pigou was not much of a Pigouvian.

 Applied today, his warning suggests that instead of offsetting the cost of systemic risk, the purpose of the bank tax likely is to punish high-paid bankers (or at least make the public believe the bankers are being punished), or just simply to raise revenue for a deficit-plagued government.

Today there is much ado about Arthur Cecil Pigou  But much of it is unjustified, at least in the view expressed by Pigou himself. Clearly, politicians and pundits need intellectual justification for their actions and opinions, but it is inappropriate to hang taxes and regulations that are claimed to make things better around the neck of Pigou. It is not that taxes, regulation, and subsidies are ineffective in changing behavior. Indeed, we all know that incentives matter. Nudges work. But the real question is, do those political instruments make things better? That remains an open question.

On similar lines Jevons Paradox applies. You may apply a tax based on Pigou’s ideas (though Pigou himself would be sceptical) but it could just turn out to be a Jevons Paradox.

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2 Responses to “Understanding Jevons Paradox is as critical…”

  1. William Lee Says:

    Jevons proposal seems to fail to qualify as a paradox. Calling it one may tend to mislead.

  2. William Lee Says:

    Just to note that behaviors associated with the principle Jevons proposes include behaviors related to risk-taking and to safety, eg machine guards, though valuable in the immediate, result in workers disregarding the dangers created by machines. This might be considered as the economy of risk. Similarly, canonized safety protocols result in fewer, but larger, epi-risks, eg the loss of HMS Thetis. One is inclined to speculate that in the global sense – Jevons writ large – an awareness of Jevons combines with Jevons to create a low frequency large amplitude series of feedbacks.

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