One of the first lessons in an economics class is “People respond to incentives.” This concept is quite intuitive. When you were a child and your parents threatened to ground you if you said a bad word, you tried not to say that word where they would hear you. If you are tested in a class and grades matter, you will learn the material (at least we professors hope!). After school, you’ll get a job to pay your bills. Nowadays, when governors and mayors order us to stay home, most of us do it. In other words, if you give someone a reward or a penalty for doing something, they are more likely to do it.
These responses to incentives are obvious. But sometimes rules create incentives that rule-makers do not foresee. Policymakers therefore have to consider people’s responses to changes in policies carefully. A change to a law may incentivize people to do something unintended; it may even cause them to do the opposite of what the policymakers wanted.
Here is one of my favorite examples:
In 2008, Congress wanted to reduce tobacco consumption and raise money for a child health insurance program. So, they placed a tax on tobacco products – including roll-your-own tobacco. What should the effect be? Lower consumption from higher prices. But, oops, these policymakers forgot to include one form of tobacco – pipe tobacco. What do you think happened to consumption of pipe tobacco after the tax? It skyrocketed (do rockets go anywhere else?). Why? People could easily take pipe tobacco and roll it in paper, just like you would with roll-your-own tobacco. Jason Furman discusses this “mistake” here.
Similarly, sometimes when states enact a new law or new taxes on a product people just cross borders to avoid those laws, rather than switch to a new product.
A few examples:
a) Payday loans (high interest, short-term loans due on someone’s next payday) are illegal in some states. It has been shown that people on the border of states will cross state lines to get payday loans to skirt the law. (Brian Melzer has an interesting economics paper that uses this change in behavior).
b) When some states have greater taxes on gasoline, people living on the border will again cross state lines to fill up. (source)
c) What about cigarettes? State laws on cigarettes vary, and when some states try to increase taxes it may cause two things: 1) people cross state lines to buy cigarettes or 2) a black market develops where people purchase large quantities of cigarettes on one side of the border and then re-sell them illegally in states with the higher taxes. In 2017, 55% of cigarettes consumed in New York had been smuggled from another state (source).
d) Finally, given that some states have legalized the selling of marjuana and some have not, it is not surprising that people will travel across state lines to buy it. This really interesting podcast on a paper by Benjamin Hansen, Keaton Miller, and Caroline Weber discusses these cross-border purchases.
In all of these cases examined above, a policy was made to limit or reduce behavior, but instead it just shifted people’s behavior.
How does this relate to COVID? As people are stuck inside, it seems that they are drinking more. US sales of alcohol increased 55% for the week ending March 21st, and online alcohol sales were up 243%. (source)
While drinking alcohol at home doesn’t seem to violate any rules, there is some debate on whether selling alcohol is an “essential service.” Connecticut and Massachusetts are two states that have declared alcohol retailers to be essential (although not recreational marijuana dispensaries). (source)
How did Pennsylvanians respond? Simple. They just drove to Ohio and West Virginia to get alcohol. (source)
Oops. That plan backfired. By closing stores, Pennsylvania’s government was trying to limit people’s movement. Instead, they just increased it.
Ohio and West Virginia did not like this (although I’m sure the liquor store owners in the state did), so they have now restricted the purchase of alcohol to only those with an Ohio or West Virginia license. (source)
Now you can’t just cross the border to get alcohol. Pennsylvania has reopened its liquor stores for online sales; but if its system doesn't work well I wouldn’t be surprised if some black markets popped up. Or increased homebrewing.
Moral of the story… policies don’t always have their intended effect. In fact, sometimes they incentivize people to do “worse” things to avoid the rules.
Did you know you could make vanilla extract at home? And it is way cheaper than buying it in the store. Below are a number of links to how to make homemade vanilla from my two go-to food bloggers, but here is the gist:
Buy some alcohol. If you don’t want your vanilla to have a specific alcohol flavor, buy vodka.
Add vanilla beans. You can buy them on amazon for cheap.
Store in a dark part of your cabinet. Every day or so, take it out and shake it.
Store for at least a month or up to a year to get a more intense flavor.
Enjoy in your favorite baked goods or give to friends as a gift!
*** In colonial times there was a tax on closets. If you could afford to build a closet, then you would be taxed more. Hence, people did not have closets. Ok… this is actually apparently a myth, but it is a fun explanation for why there are few closets in old houses. (source 1 & 2)