On an average day a shoe store sells 100 pairs of

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Unformatted text preview: ink in terms of all the products that “would have been” produced and consumed had the highway not been built. If, say, more clothes would have been produced instead of highways, more people would have worked in the clothing industry and fewer would have worked in highway construction. On an average day a shoe store sells 100 pairs of shoes at an average price of $40 a pair, thereby earning $4,000. One day the store owner decides to raise the price of shoes from an average of $40 to $50. What do you think he expects the effect of his action to be? He probably expects to increase his earnings from $4,000 a day to some greater amount, perhaps to $5,000 (100 pairs of shoes $50 $5,000). The store owner might be surprised by the results. At a higher price, it is likely that he will sell fewer pairs of shoes. Suppose that at a price of $50 a pair, the owner sells an average of 70 pairs of shoes a day. What are his EXAMPLE: Thinking in Terms of Unintended Effects EXAMPLE: Section 2 The Economic Way of Thinking 17 01 (002-029) EMC Chap 01 11/17/05 4:03 PM ? Do Seatbelts Cause Accidents? M ost states have mandatory seatbelt laws for drivers. Seatbelt legislation was passed to save lives. That was its intent. Soon after states started adopting mandatory seatbelt laws, an economist undertook a study. He wanted to find out if seatbelt laws really did save lives. His study showed that the number of car deaths before seatbelt laws was the same as the number of car deaths after seatbelt laws. This finding perplexed him because common sense tells us that if you are in an accident you have a better chance of surviving if you are wearing your seatbelt. So, what explained the economist’s finding? The answer is this simple equation: Page 18 Number of car deaths Number of accidents Probability of being killed in a car accident What seatbelt laws did was lower the “probability of being killed in a car accident.” Yet, if they lowered this probability, and the number of car deaths was still the same (before and after the seatbelt law), then the only thing that could THINK ABOUT IT explain this finding was that the “number of accidents” had to rise. This change is exactly what the economist found. In other words, one unintended effect of the seatbelt law was that the number of average daily earnings now? ($3,500 = 70 pairs of shoes $50) The owner did not intend for things to turn out this way; he intended to increase his earnings by raising the price of shoes. The decrease in his earnings is an unintended effect of his actions. Suppose that U.S. citizens are buying some Japanese goods (such as Japanese cars), and that Japanese citizens are buying some goods produced in the United States (such as U.S. computers). Then things change: the Japanese government decides to place a $200 tax on every U.S. computer sold EXAMPLE: 18 Chapter 1 What Is Economics? accidents increased. (Economists are interested in unintended effects.) Why did the number of accidents increase? Some have suggested that drivers feel safer wearing a seatbelt and that drivers who feel safe are more likely to take risks on the road than drivers who do not feel safe. (Might drivers in large Hummers take more risks than drivers in Honda Civics?) Obviously, the way to be safe while driving a car is to wear your seatbelt and drive as carefully as you would if you weren’t wearing your seatbelt. In other words, don’t let wearing the seatbelt lull you into driving recklessly. The intended effect of placing a safety cap on medications is so that children don’t get into the medicine and eat it because they mistakenly think it is candy. Can you think of an unintended effect of placing safety caps on medications? in Japan. People in Japan who buy U.S. computers will have to pay $200 more than they would have paid without the tax. Why might the Japanese government impose this tax? It may want Japanese computers to outsell U.S. computers; it may want to generate higher profits and greater employment in the Japanese computer industry. To accomplish these goals, the government deliberately makes U.S. computers more expensive than Japanese computers by placing the tax on U.S. computers. This action ends up hurting U.S. computer companies, because they sell fewer computers. 01 (002-029) EMC Chap 01 5/8/06 4:48 PM Page 19 The United States could decide to retaliate by placing a tax on Japanese cars sold in the United States. Japanese cars will be more expensive, and fewer will be sold. This action will hurt Japanese car companies. Do you see what has happened? Japan initially takes an action—placing a tax on U.S. computers sold in Japan—hoping that the Japanese people will buy more Japanese computers and fewer U.S. computers (the intended effect of the action). The intended effect is realized: the Japanese people actually do buy more Japanese computers and fewer U.S. computers. But there is an unintended effect too: the United States places a tax on Japanese cars, which ends up hurting Japanese ca...
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This document was uploaded on 01/16/2014.

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