Wednesday 06 Oct 2021 | 20:03 | SYDNEY
Wednesday 06 Oct 2021 | 20:03 | SYDNEY

Good and bad economic behaviour


Sam Roggeveen


12 August 2011 15:20

Like Scott Adams, I know just enough about economics to be stupid at a slightly more dangerous level than the general public.

I've been very taken with behavioural economics in the last few years. There's something satisfying about the idea that you can subtly exploit people's habits and prejudices to bring about good economic outcomes. Behavioural economics also implies a different model to the grand, top-down reforms that so transformed the Australian economy from the 1980s, as it suggests that you can also bring about major change by manipulating the millions of small decisions made by individuals.

Here's a notable example from The Netherlands, where road congestion charging is being trialled. Motorists carry taxi-like meters in their cars, so they know how much tax they're paying on each kilometre they drive:

...studies have found that the meters provide instantaneous negative feedback, the kind that psychologists say changes behavior.

“At the beginning you’re looking at it all the time and thinking of costs, and pretty quickly it starts to influence what you do,” said Mr. Van Dedem, whose rush-hour airport ride would have incurred a charge of just over $5 under the rates proposed in the Netherlands.

The effect has been lasting: even though the trial was two years ago and the meter has been removed, he now works from home more in the mornings and walks to the market, he said.

But also in the realm of encouraging consumers to make the right 'small decisions', here's a cautionary tale from California, where Governor Gerry Brown is embracing 'distributed energy generation' to avoid the pitfalls and risks of building large power plants:

But energy policy that relies on distributed generation has its drawbacks. Perhaps most notably, it forsakes economies of scale. It also places infrastructure investment decisions in the hands of homeowners, who, as this space has suggested, may not make socially optimal—or even individually rational—choices.

Early evidence from California suggests that because of these drawbacks, relying on tiny decisions is no silver bullet to a green energy future—and it could be a big mistake.

How else to describe the state's decision to partner with homeowners to install 1,923 residential rooftop solar installations in San Francisco, which the National Oceanic and Atmospheric Administration characterizes as having persistent clouds and fog during the summer?

I know there's a lot of scepticism about behavioural economics in the broader economics fraternity, so I'm trying to keep my dangerous stupidity in check.

Dilbert cartoon courtesy of Scott Adams.