May 7, 2008
Harford vs Ariely - final round
The full discussion is here; my final post is here, about climate change. Here’s the guts of it:
Standard economics has a solution: a carbon tax, or a tradable permit scheme, to raise the cost of emitting carbon. We’d all have an incentive to cut down by driving less and turning down the heating or air conditioning, and also by insulating our homes and finding more efficient cars and fridges. Businesses would also cut back, and would have an incentive to develop new technologies.
Behavioral economics draws attention to different considerations. For example, we’re not as smart as conventional economics assumes, which means that we might fail to notice ways to reduce our energy bills. We might also need to be reminded about what our neighbors are doing: psychologist Robert Cialdini showed that we’re more likely to recycle if we think everyone’s doing it. That may hold true for carbon-saving too. And although we’re reminded of high gas prices every time we fill up, we really need to be reminded of them when we’re buying a new car or a new fridge.
So which approach is right? That’s a strange question. They can both be right, and I think that they both are.
Of course, the economic incentives will work. I don’t think there’s any serious doubt that raising the price of carbon would persuade us to pollute less. The Logic of Life showed that we are sensitive to these simple incentives in the most unexpected situations. For instance, raising the risk of unprotected sex persuaded American teens to have more oral sex instead; and two Australian economists, Joshua Gans and Andrew Leigh, have found that tax incentives can persuade pregnant women to delay labor, and even deter people from dying too quickly. (It’s really true: the death rate in Australia dropped in the week before inheritance tax was due to be abolished, and then sharply rose the week immediately after. A lot of people were clinging on to life to avoid their estates being taxed.) If people will change their date of death or the day they have a baby in response to a tax incentive, I am quite sure that they will be more environmentally friendly, too.
But I am also sure the behavioral insights will produce results. Cass Sunstein and Richard Thaler report one dramatic success: people cut back dramatically if the electricity company gives them an “Ambient Orb” that glows red when they’re using a lot of power. There’s no standard economic theory that explains why that should be; and that is just one example.
Group hug in the end - sorry.
