Class Summary #17 for 10/12/11

Today in class, we learned a lot more about unintended consequences, and how the "Law of Unintended Consequences" can wreak havoc on policy makers.

Here are some examples of unintended consequences that Prof. Rizzo shared in class today:

1. In the country Bavaria, there was a law that mandated couples couldn't have children unless they were considered financially stable by the Bavarian government. If a couple wasn't financially stable, they couldn't get married in the country and have kids. The policy was created to make sure children are sufficiently taken care of. By the end of the policy, however, there were actually more issues with childcare then there were prior. The reason behind this was because 50% of kids' parents were divorced because people weren't getting married anymore, they just had kids.
2. 1914- US bans drugs. The ban on drugs led to an increase in hypodermic needle usage. Needle usage has been linked to the spreading of AIDS. Perhaps if there was not the 1914 drug ban, AIDs would never have spread like it has today.
3. 1992- Americans with Disabilities Act- government threatens that bad things will happen to companies if they discriminate in payments/labor opportunities for people with disabilities. What resulted from this? There was a sharp decrease in the amount of disabled people who were hired for jobs because employers didn't want to risk getting in trouble with the government. Anytime a company had the need to fire a disabled person, the disabled person would be able to claim they were being discriminated against. Thus, there was more of a potential cost for companies to hire disabled people because of the ramifications that could happen if they had to fire a disabled person for whatever reason.

So, what exactly is this law? It is basically occurs when people try to fix a complex process with a simple process. The Law of Unintended Consequences may take place due to:

1. Limited Information
2. Little feedback
3. Incentives get mixed up

Unintended consequences change incentives in many instances, and thus, usually increases costs to do something in at least one regard.

Then, we went over some more basic principles of economics.

1. Trade is not zero sum---> we are all better off when we trade.
1. "Pie Fallacy"- the idea that wealth is fixed (similar to mercantilist thought). It's the idea that if one person gets the bigger slice of pie, someone must be losing out. We have come to learn today that this is untrue.
2. Exploitation= when one person gets the better deal than the other person. Exploitation doesn't in any way raise living standards.
3. Consequences of Exploitation: 
1. Slows down economic growth because policies are than made to penalize work/innovation, which is vital to economic growth
4. Wealth vs. Income is different
1. Wealth= "stock"- value of stream of income one has produced through his/her life
2. Income= "flow"
5. Bill Gates/Tiger Woods/Paul McCartney (all billionaires)- their billion dollars (which is income) is only a small indicator of how much value they are to society. Take Woods for example. He might have a billion dollars, but think how much more value he brings to society- because of him, golf clubs, clothing, shoes, shaving cream, etc. is sold because of his endorsements of certain products. Also, must take into account how much value people get when watching him play golf. It might cost $3 to go see him play live, but people probably get more value than just $3 watching him. People who watch on TV also value watching him. If they value watching him at $1, think about how much money/value/worth he is generating for all of the millions of fans who watch him.
1. Thus, one could make the argument that none of these billionaires are actually being paid ENOUGH!