Many decisions in life involve small incremental adjustments to existing action plans. Economists call these adjustments marginal changes. In many cases, people can make the optimal decision by considering the marginal quantity.
For example, suppose a friend asks you how many years he should go to school. If you compare the lifestyle of a person with a doctorate with that of a person who has not finished primary school, he will complain that this comparison is not helpful to his decision-making. Your friend has probably received some education and will decide whether to go to school for another year or two. In order to make this decision, he needs to know the extra benefits and costs of one more year of school. By comparing this marginal benefit with marginal cost, he can evaluate whether it is worthwhile to study for another year.
For another example, consider how marginal quantities can help decision-making. Think about how much reciprocal refund an airline decides to charge its passengers. Suppose a 200-seat plane flies across the country once, the cost of the airline is $654.38 million. In this case, the average cost of each seat is $654.38+$2 million, or $500. Some people will come to the conclusion that the plane fare should never be less than $500.
But airlines can increase profits by considering the marginal volume. Suppose a plane is about to take off, and there are still 10 seats. Passengers waiting for a refund at the gate are willing to pay $300 for a ticket. Should the airline sell him a ticket? Of course you should. If there are seats on the plane, the cost of adding an extra passenger is negligible. Although the average cost of a passenger's flight is 500 dollars, the marginal cost is only the cost of a bag of peanuts and a can of soda that extra passengers will consume. As long as the money paid by the passenger waiting for the refund is greater than the marginal cost, it is profitable to sell him the ticket.
As these examples illustrate, individuals and enterprises will make better decisions by considering marginal quantities. Only when the marginal benefit of a behavior is greater than the marginal cost will rational decision makers take this behavior.
Principle 4: People will respond to incentives.
Because people make decisions by comparing costs and benefits, when costs or benefits change, people's behavior will also change. In other words, people will respond to incentives. For example, when the price of apples rises, people decide to eat more pears and less apples, because the cost of buying apples is high. At the same time, the owner of the apple orchard decided to hire more workers and pick more apples, because the income from selling apples was also high.
For those who design public policies, the core role of incentives in determining behavior is very important. Public policies often change the costs or benefits of private behavior. When decision makers fail to consider how behavior changes due to policy reasons, their policies will have unexpected effects.
To illustrate this unnecessary influence, consider public policies on seat belts and car safety. Few cars were equipped with seat belts in the 1950s. Now all cars have seat belts. The reason for this change is public policy. In the late 1960s, Ralph Nader's book "No Speed is Safe" aroused public concern about automobile safety. Congress responded by passing legislation requiring car companies to produce all kinds of safety equipment, including seat belts, which became the standard equipment for all new cars.
What effect does the seat belt law have on automobile safety? The direct impact is obvious. Since all cars have seat belts and more people wear seat belts, the probability of surviving a major car accident has increased. In this sense, seat belts have saved some lives. This direct impact of seat belts on safety is the motivation when Congress requires seat belts.
However, in order to fully understand the impact of this law, we must realize that people have changed their behavior because of the incentives they face. In this case, the relevant behavior is the speed and caution of the driver when driving. Driving slowly and carefully is expensive because it consumes the driver's time and energy. Rational people should be more cautious about the marginal revenue and marginal cost of driving when deciding the degree of cautious driving. When the benefits of improving safety are high, they will drive more slowly and carefully. This can explain why people drive more slowly and carefully when the road is frozen than when the road is clean.
Now consider how the seat belt law changes the cost-benefit calculation of a rational driver. Seat belts reduce the driver's accident cost, because it reduces the probability of casualties. Therefore, seat belt laws reduce the benefits of slow and careful driving. People's reaction to seat belts is the same as that to road improvement, so they drive faster and more recklessly. In this way, the end result of the seat belt law is more car accidents.
What effect does this law have on the number of people killed by driving? Drivers who wear seat belts are more likely to survive any accident, but they are more likely to find themselves in more accidents. The net effect is uncertain. In addition, the decline in the level of safe driving obviously has a negative impact on pedestrians (and drivers who do not wear seat belts). They will be in danger because of this law, because they are likely to find themselves in a car accident without seat belt protection. Therefore, seat belt laws often increase the number of pedestrian deaths.
At first glance, this discussion about incentives and seat belts seems to be groundless speculation. However, the economist Sam Peltzman explained in an article published in 1975 that, in fact, the automobile safety law has many such unexpected effects. According to Pezman's evidence, these laws have reduced the number of deaths in every car accident and increased the number of car accidents. As a result, the death toll of drivers has not changed much, while the death toll of pedestrians has increased.
Pezman's analysis of automobile safety is just an example of the general principle of people's response to incentives. Many incentives studied by economists are more direct than automobile safety laws. For example, no one is surprised that taxing apples will lead people to buy fewer apples. However, as the example of seat belts shows, policies sometimes have unobvious effects in advance. When analyzing any policy, we should not only consider the direct impact, but also consider the indirect impact of incentives. If the policy changes the incentive mechanism, people will change their behavior.
Ask and answer questions and briefly explain the four principles of personal decision-making.