Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't (16 page)

Environmental problems arise because the costs of polluters’ actions are passed on to other people.
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The classic case is the “common pool” or “overfishing” problem. Fishermen tend to overfish an area until the fishery is depleted. If one fisherman lets a fish go so that it can spawn, there is no guarantee that another fisherman won’t catch that same fish. But this problem is eliminated in privately-owned fisheries like
private lakes or fish farms. If a fishery is running low on fish, the owner can leave fish to spawn knowing that no one else will catch them.

Outdoor air pollution suffers a similar “common pool” problem; if too many individuals or companies emit too much pollution, the combined result can produce illness and even death. Everything from cars to power plants emit byproducts that could be classified as harmful, but no one would argue that we should eliminate cars and power plants because their pollution costs outweigh all their benefits. Similar to fishermen out at sea, individual car makers or factory owners are unlikely to take into account the cost that their pollution imposes upon others. Altruism only goes so far. This creates a legitimate space for government intervention—governments can regulate pollution levels by limiting, taxing, or otherwise restricting pollution emissions.

The problem here is that the government’s inevitable tendency is to increase the scope of its authority. Allowing the government—whether federal, state, or local—to regulate pollution may be necessary, but we can only watch with dismay as the government uses this authority to steadily expand its coercive powers. In doing so, it inevitably begins mandating solutions to tangential “problems” that are best left to the market to solve.

This is most evident today in the restaurant industry, where local governments are becoming increasingly intrusive in ensuring clean air by banning smoking. A restaurant owner will face competitive pressures to decide whether his customers want to be allowed to smoke, just as he must figure out what food to serve, how big the portions will be, and what kind of décor to have. Restaurants that don’t satisfy their customers on these issues will quickly go out of business.

That’s why smoking in restaurants should not be considered a common pool problem subject to government intervention. Restaurants that allow smoking don’t base their policy merely on their love of smokers; they are responding to competitive pressures and customer preferences. And of course, the choice doesn’t have to be between perfectly
pristine air and air so cloudy that you can’t see more than a few feet; many restaurants simply create smoking and non-smoking sections. But this solution, too, is outlawed by government smoking bans.

If restaurants can go out of business when they don’t get small things right, like whether to include an extra side dish with a meal or what kind of background music is played, why is there any less reason to believe their decision on smoking will likewise reflect customer demand? If anything, the fact that people feel so strongly about smoking—both for and against—implies that restaurants will very carefully tailor their smoking policies to their customers’ wishes.

Restaurant smoking is more like a private fishery than a common pool. And the best thing the government can do to ensure people get the air quality they want is to let the market decide.

To conclude, the free market is remarkably inventive. Given enough time, all kinds of seemingly insurmountable problems can be overcome if someone stands to earn a profit by finding a solution. In contrast, government intervention, although often well-intentioned, faces inherent economic and political problems that make it costly and naturally inefficient. As Milton Friedman famously pointed out, “Nobody spends somebody else’s money as carefully as he spends his own.”
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Looking at examples from Airbus to NASA to state licensing systems, it’s hard to disagree.

If something becomes more costly, people will do less of it. This is the fundamental principle of economics—a simple notion that also explains a lot of human behavior in realms seemingly far removed from trade, industry, and finance.

Take sports, for example. When college basketball’s Atlantic Coast Conference increased the number of referees per game from two to three in 1978, the number of fouls dropped by 34 percent. Why? Basketball players fouled less often because they were more likely to get caught. In fact, the actual decline in fouling was probably even larger, since fouls that may have gone unnoticed by two referees were more likely to be caught when there were three.
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We find the same kind of incentives at work in baseball. The American League has more hit batsmen than the National League, but this difference only appeared after 1973, when the American League removed its pitchers from the batting lineup in favor of designated hitters. Since American League pitchers no longer worried that they themselves would
be hit in retaliation if they threw at an opposing batter, they began throwing more beanballs.
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The reverse of this fundamental principle also holds true: when you make something less costly, people will do more of it. And if you offer a meaningful reward for some type of behavior, you can bet more people will do it, even if they shouldn’t. This is borne out by a study of a specific type of fraud by air traffic controllers.
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To receive disability benefits due to job-related stress, air traffic controllers must present a well-documented stressful incident—a collision or close call—that has caused a deterioration in their performance. Unsurprisingly, when it became easier to file for disability, flights suddenly started experiencing more “close calls.” And these were not cases that the air traffic controllers could simply make up; they were reported by a sophisticated performance evaluation called the “Operation Error Severity Index.”
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Analyzing incentives in this way is a particularly good method for studying crime. It helps reveal what factors increase criminality, and what methods work best to reduce crime rates. Studying incentives also leads us to some surprising conclusions about the effects of abortion, affirmative action, and the death penalty on crime, while showing how certain kinds of high penalties and other policies can inadvertently increase crime rates.

Violent crime in the United States shot up like a rocket after 1960. From 1960 to 1991, reported violent crime increased by an incredible 372 percent. The disturbing trend was seen across the country, with robbery
rates peaking in 1991 and rape and aggravated assault following in 1992. But then something unexpected happened—between 1991 and 2000, rates of violent crime and property crime fell sharply, dropping by 33 percent and 30 percent, respectively. Murder rates were more stable up to 1991, but then they also plunged by a steep 44 percent.
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This drop in crime was particularly surprising because it occurred after some academics had predicted that the advent of “super-predators”—a rising generation of conscienceless violent youth—would soon lead to an explosion of crime.
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Also unexpectedly, the phenomenon was not confined to the U.S.—a remarkably similar pattern was evident in Canada, where violent crime rates peaked in 1992 and property crime and murder rates topped out in 1991. While the declines in violent crime and murder rates during the 1990s were smaller in Canada than in the United States, the fall in Canadian property crimes was slightly larger.
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What’s more, the drop in crime may be even larger than these statistics indicate due to one factor that is often overlooked: rising rates of crime reporting by victims. With the exception of the data on murder, the crime data cited above—supplied by the FBI—are based on crimes that victims reported to police departments. But, of course, not every victim reports when a crime occurs. Victims are most likely to report two kinds of crimes: the most serious crimes and the ones that they believe have the greatest chance of being solved. These trends reinforce each other: victims report the most serious crimes, which in turn receive the most attention from police. This makes serious crimes more likely to be solved and thus even more reporting is likely to occur. Two simple diagrams show how the rate of reporting of violent crimes and property crimes in the U.S. has increased alongside rising arrest rates, suggesting that the increased arrest rates have encouraged more reporting.
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