23
Nov
2019
Murphy + von Pepe > 2 Nobel Laureates
In my latest piece for Mises.org, I push back on two of the recent Nobel laureates when they claimed in the NYT that financial incentives don’t matter as much as economists think. Since they had invoked salary caps in sports as an example, I acquired the assistance of the intrepid von Pepe to give me specifics.
In any event, perhaps the most surprising detail is that I’m pretty sure the NYT charts on Alaska prove the exact opposite of the narrative they’re pushing.
Bob, what is the origin of this “the (blank) von Pepe” joke? I’ve been hearing it for years from you.
His parents originated the enigmatic von Pepe, and I originated the obscure joke.
Nice article. A few points:
1. Nice use of the phrase “phantom menace”!
2. Let’s say carbon taxes, sin taxes, and speeding tickets don’t change behavior much. Correct me if I’m wrong, but doesn’t that also imply that they have almost no deadweight loss? This would mean that — even though they don’t solve the problem they were supposed to solve — they aren’t such bad taxes to have. Of course, you could make the same argument about any tax they name, since *none* of them allegedly change behavior! So there’d be no reason to switch from labor taxes to carbon taxes, for instance.
3. Their salary cap argument is ridiculous. Thanks for call them out.
If your speeding fine is $100 then at some stage there must be some other item worth $100 that you didn’t buy. You might decide to keep speeding, but regardless of that, it will change your economic behaviour.
Not sure if that counts as a deadweight loss … you missed out on the thing you would otherwise have presumably wanted.
I am not sure. Deadweight loss from tax as I understand it is the loss suffered by opting for something you would not have done without the tax. If we tax speeding at $100 and as a consequence you decide to avoid speeding, the deadweight loss is that you get to places more slowly.
If you decide to speed anyway, that is a direct cost – you prefer to spend $100 to get there faster and your behaviour has not changed. The deadweight loss is a result of the triangle in the supply demand curve that results from a shift in supply. If the supply does not shift (there is no change in behaviour) there is no triangle.
That does not mean there is no loss, but I am not sure it would be called a deadweight loss. Any clarification would be welcome.
There are few things that are totally inelastic.
Extending the speeding example, people driving too fast causes external loss. I want to drive through town at 80mph because I am in a rush and I think the risk to myself is worth it to me. However, I am also imposing risk on other people. This is inefficient because I don’t bear the total cost, so I drive faster than the efficient speed.
Imposing a fine results in me suffering a “personal deadweight loss” because my behaviour has changed to drive more slowly to avoid the fine. Everyone else gets a “deadweight benefit” because they do not get killed by a speeding maniac. If the benefit to others is greater than the cost to me the result is more efficient.
The same result could in principle be arrived at by making me pay all the costs that result from driving too fast. This is probably impossible because if I kill people or injure them badly I probably do not have enough money to pay. Also there would be quite a lot of cost in establishing how much I should pay.