Steven E. Landsburg
Mandating safety features like seatbelts and padded dashboards lowers the cost of having an accident by increasing the driver's chance of survival. When the cost of risky behavior falls, individuals naturally choose to consume more of it. Consequently, drivers respond to safer cars by driving faster and more recklessly. This behavioral shift offsets the mechanical advantages of the safety equipment, resulting in more total accidents and shifting the burden of injury from protected drivers to vulnerable pedestrians and cyclists.
Unless an individual possesses highly unusual preferences or talents, no single activity or location can yield greater satisfaction than the next best alternative. If a polluted town suddenly enacts strict environmental regulations to purify its air, the town becomes a more desirable place to live. The influx of new residents immediately bids up the cost of housing until the higher rent exactly cancels out the value of the clean air. Consequently, the only individuals who genuinely profit from the environmental improvement are the landowners, because land is a fixed resource that captures all the economic gains of the heightened demand.
Taxes destroy wealth by motivating people to alter their behavior to avoid the financial penalty. When a tax raises the price of a good, a consumer who would have otherwise purchased it drops out of the market entirely. The buyer loses the benefit of the purchase, and the seller loses the profit, but the government collects zero revenue from the aborted transaction. This vanishing of mutual benefit creates a deadweight loss, meaning the economic damage inflicted on the public vastly exceeds the actual dollars transferred to the state treasury.
Buyers frequently possess more accurate information about their own habits than sellers do, forcing markets to rely on indirect signals. Insurance companies offer discounts to nonsmokers not merely because avoiding tobacco improves physical health, but because the discipline required to abstain from smoking reliably indicates a generally cautious personality. If cigarettes were banned entirely, the insurance company would lose its most effective tool for distinguishing reckless individuals from careful ones. Without this sorting mechanism, careful individuals would be forced to subsidize the risks taken by their reckless neighbors through universally higher premiums.
When property rights are clearly defined and individuals can negotiate freely, judicial rulings cannot dictate the ultimate allocation of resources. If a court permits a noisy factory to disrupt a neighboring medical clinic, but the clinic values silence more than the factory values operating its loud machinery, the clinic will simply pay the factory to shut down. The resource always flows to the party willing to pay the most for it, regardless of who initially wins the lawsuit. The judge's decision only determines who must pay whom, leaving the actual economic output of the community completely unchanged.
International trade functions identically to a mechanical production process. Citizens can manufacture automobiles directly by assembling steel and glass in a domestic factory, or they can grow them by planting wheat in the fields, harvesting it, and shipping it across the ocean to be transformed into vehicles. Enacting protectionist tariffs to shield domestic factories from foreign competition deliberately cripples the agricultural method of car production. This forces the economy to rely on less efficient manufacturing techniques, raising the total cost of goods and impoverishing the population as a whole.
Stock market prices incorporate all publicly available information instantly, meaning current prices are the only accurate predictors of future prices. Because changes in asset values are driven entirely by unpredictable news, the daily fluctuations behave like a random walk, rendering historical price charts useless for forecasting. The popular strategy of investing fixed amounts of money at regular intervals introduces unnecessary risk into a portfolio. It leaves early investments exposed to market volatility for longer periods without offering any mathematical advantage in return.
Behaviors that appear entirely irrational often maximize efficiency and profit upon closer inspection. Movie theaters charge exorbitant prices for snacks rather than admission tickets to extract maximum revenue from patrons who derive the most enjoyment from the experience. Consumers who purchase popcorn demonstrate a higher willingness to spend, and the overpriced food acts as a sorting mechanism to charge them more without driving away frugal moviegoers. Similarly, promoters underprice rock concert tickets to guarantee long queues, ensuring the audience consists entirely of dedicated teenagers who will spend heavily on profitable merchandise.