Behaviour and money
Despite all the behavioural economics talk, conventional incentives remain a major influence (albeit not necessarily as intended!) on our behaviour — and vice versa
The state of New York is the latest territory where new measures to reduce single-use packaging have come into force. Plastic bags are banned, and if you want a paper bag, the shops in several cities (including New York City) will charge you 5 cents. It is enough to make the heart of any righteous, libertarian paternalist nudger break out into spontaneous bleeding.
That a ban can be an effective way to influence behaviour is easy to understand -depending on how it is enforced at least. The great economist Gary Becker had a point, when he argued that, often, we are rational criminals at heart: the conventional economic view of a ban is that it imposes such a high price on violating it, that it outweighs the expected gain of doing so.
Small charge, large effect
But the imposition of a small charge for each bag you need is on a different scale. Imagine yourself in the supermarket a couple of years ago — before any such measures — with, say, £150 ($195, €175) worth of shopping in the trolley, enough to fill six or seven plastic carriers. Then the till operator informs you of a special money-saving promotion: if, next week, you bring your own bags, you’ll get a discount of 5p per bag. You do a quick calculation, and work out that this would reduce your weekly shopping bill by just over 0.2%. Is that really worth the bother?
For many people, probably not. But framed as an additional cost, charging for a bag has been a remarkably successful way to reduce usage. (An alternative approach in Canada backfired, as demand for ‘bags of shame’ at Vancouver’s East West Market went up, rather than down. They are now available as reusable bags.) In the UK, the 5p charge was introduced in 2015, when the average customer took home 140 bags every year. One year later that had fallen dramatically to about 25 bags, in 2017–2018 it dropped further to 19 bags per customer, and last year it was just 10. This is not just about a material disincentive: it is about having to pay at all. Can you think of a product, any product, that you buy on a weekly basis, and where an increase in the price of just 5p would cause a reduction in demand of 93%?
This, however, is not the entire story. A study by Rebecca Taylor, an economist at the University of Sydney, found that there is a (hitherto) hidden time cost to such policies: a slowdown at the till of, on average, 3% of the duration of the transaction. This extra time needed at the checkout is due to the time it takes to purchase the bag, and persists for at least two years after the introduction of the policy. But the modest average delay conceals a bigger effect on the customer experience. A transaction where bags are purchased takes 10% more time, and at busy times, everyone in the queue experiences the delay caused by every customer in front of them. The author calculates that this corresponds with an annoying 1.7 minutes extra wait for each customer during peak hours. And that is the kind of thing that chases customers away — further analysis of the data suggests a one-minute increase in the average transaction duration reduces the likelihood that the customer will return to the store in future by 1.2%.
Unexpected behavioural consequences
It seems the disincentive of a charge for disposable carrier bags may well have more than one effect on consumer behaviour. And there is more still — even the overall environmental effect of the reduction in single-use shopping bags may not be as clear-cut as the headline figure suggests. According to another study by the same researcher, shoppers who no longer receive free carrier bags make up for this by buying more plastic garbage bags. This phenomenon, where new regulation of a product leads to a growth in consumption of related unregulated products, is known as “leakage”. The reduction in the use of disposable carrier bags meant a drop in plastic consumption of 40 million pounds (18,000 metric tonnes), but that was partially offset by the rise in garbage bag sales, corresponding to 12 million pounds (5,500 tonnes). (One reason was that people could no longer recycle their shopping bags as bin liners or reuse them in other ways.)
So charges and taxes can change behaviour, but not necessarily exactly as desired. Sometimes the behaviour is entirely unintended, as a recent tweet by Lionel Page, an economist at the University of Technology in Sydney, (and the subsequent thread) illustrated. Authorities in the past (and present) rightly concluded that a property tax is hard to avoid, because it is hard to conceal property. But their approach met with the resourcefulness of the citizens to enjoy the benefits of their property, while legitimately avoiding paying the tax. In the UK (and many other countries), a window tax led to windows (and occasionally even doors) being bricked up — the occupants clearly valued space over daylight. (In 19th century Mexico, the tax only applied to windows, so these were made to start at floor level and were the minimum height to be considered a door.)
In the Netherlands, the effect of a property tax in the 17th century, based on the width of the façade is still very apparent in Amsterdam’s narrow canal houses (the narrowest is just 2m wide), which are very tall and deep (and sometimes even wider at the back than at the front). Something similar was the case in New Orleans. In France, there used to be a tax on floors, but roof storeys were exempt, which led to peculiarly French roof designs. Many countries, including Bolivia, Peru, Greece and Egypt, apparently exempt unfinished dwellings from property tax — you guessed: people make sure their house looks properly unfinished forever more with the odd missing window, wall or roof.
The taxman gets smart
But the tax authorities are not always so easily fooled; au contraire. If you have ever stayed in a hotel, guest house or even rented accommodation, chances are you had to pay a small tourist tax for every night’s stay. However, in Uruguay, in 2018 the government did the opposite, with a sizeable incentive: foreigners visiting the country would receive an automatic refund of part of the 22% VAT that is levied in restaurants and hotels, and on car rental. This may well have changed some people’s behaviour, and enticed them to come to Uruguay rather than go elsewhere.
There was a condition, though: to qualify for the discount, they had to pay the bill with a debit or credit card — no cash. You wonder whether the ultimate motive of the government was solely to attract more foreign visitors… Might there be another category of people whose behaviour would be influenced by this measure?
It can be a challenge for the tax authorities to collect their rightful due from the retail trade in the absence of records of a transaction, as is — unsurprisingly — often the case in cash-based economies. But here, even if they refund a chunk of the VAT (9% of the price before tax, which corresponds with 9/22 or 41% of the VAT due), they still keep nearly 60%, where otherwise it would be zero — and they can levy income tax as well, of course. The scheme must have borne fruit one way or another, as it has been extended (and now appears to refund all of the VAT).
Such indirect behaviour change — making retailers pay tax by using incentives to influence the behaviour of the customers — can be brought about in even more remarkable ways. In Taiwan, receipts that are also lottery tickets were introduced in 1951, and the system is still running — draws are every other month, with a top prize of around £250,000 (€300,000, $330,000). It has since been copied by several countries, including Portugal and mainland China, where receipts function as scratch cards. Of course, two can play at that game, and traders exploit customers’ risk aversion by offering them immediate rewards for not demanding a receipt, like a discount or a can of pop.
Behavioural economics interventions clearly have the capability to influence our behaviour, not least where taxation (or taxation avoidance) is concerned. But we should not forget that incentives remain a powerful instrument to make us do stuff we otherwise wouldn’t. I occasionally cite economist Steven Landsburg who, in his book The Armchair Economist, says economics can be summarized in four words: “People respond to incentives. The rest is commentary.”
When you think about it — are there many nudges that would be as good in getting you out of bed and off to work as the incentive of your wages?
Originally published at http://koenfucius.wordpress.com on March 6, 2020.
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