The curse of unintended consequences

Life is complicated and the relationship between different element is not always obvious or, even when the interconnection is evident, not every aspect of the mutual influence is easy to track. The result of this complexity is the so-called unintended consequences, which do not have to be negative by their nature, but often are.

My friend Jerzy (the name is Polish and is pronounced JER-she) mentioned some days ago the trouble he is recently having with couriers: apparently in the area where he lives delivery services have started to call the customers to receive the packets curbside instead of ringing your door bell or, as is Jerzy's case, bring it up to the second floor. I do not know for a fact how this started to happen, but I can easily imagine that the couriers, being contracted as single-worker companies, get paid by the number of packets delivered not by the time it takes to deliver them. Under these circumstances, it is understandable that the couriers try to make each delivery as fast as possible, so if they shave one minute in every fifteen-minute delivery at the end of the day they might delivery one or two additional packages. In this case, the time saving is an unintended consequence of the pay structure. And, in principle, encouraging drivers not to waste time is commendable and the basics of free enterprise.

 

Photo: planet_fox on Pixabay

However, in the case of my friend, the time saving is going (in my opinion) too far, because the quality of the service is going down and it becomes an example of externality: the courier is saving his own (paid) time by using the users (unpaid) time. And when you have ordered a stationary bicycle, ferrying it upstairs costs way more than just time (they have an elevator, but it still was an ordeal).

The problem with this externality is that I am pretty sure that Jerzy was not asked to choose between curbside (which should be cheaper) or door delivery (which should be more expensive). And if markets worked properly, he should be able to choose the delivery service that bring his packets to the door. Unfortunately, most of the online merchants do not offer a choice for delivery service so the option is (after trial-and-error) choosing the vendor that uses the delivery company with the best service.

Another nice example of unintended consequences are effects of tariffs, like the ones President Trump established in 2018 on Chinese goods. Why do tariffs have unintended consequences? Because they affect whole industries, and not just the product they are attached to. Let's image a car manufacturer is buying a ton of steel from a Chinese foundry for 100 USD to produce a car with a price tag of 500 USD. However, American foundries cannot produce steel below 125 USD per ton, so the government applies a tariff of 25% on Chinese steel, so that car manufactures will have no reason to buy Chinese steel instead of the domestic one. However, the raw materials for the cars are now more expensive and the transfer in final price is more than 1:1 because of the different overheads, so the new price tag for the car is 600 USD. Now, the families that were looking for a new car in the range of 500 USD will be inclined to buy a Chinese car of that price instead of the American car, which is now a lot more expensive. For the government, the only alternative would be to establish a tariff on Chinese cars as well, so that the domestic cars have a chance to compete with foreign ones.

What is then the right solution? The answer is that there is no right solution: on one extreme one can aim for economic autarky, where the country is almost entirely supplied by internal production; on the other side is free trade, where each country focuses on the products where it has comparative advantage, importing all the others. The latter is beneficial for the consumers because it normally produces better products at lower prices (for most countries the best producer in the world is better than the best producer in the country and has bigger economies of scale), but makes countries dependent on external product and (as we have sadly seen in this pandemic) on international transport. The former, on the contrary, keeps full control of the supply chain within the country, including the ability to offer a wide range of jobs to its citizens, but with only internal competition products will typically be more expensive and possibly worse in quality.

The economy is nothing but a reflection of a world where resources are limited, and is therefore condemned to suffer the same kind of complexities as the world itself. And we have not even started to discuss the long-term effects that certain decisions can have. Let us just stay with the idea that every decision we make can have a number of indirect effects: this is not to say that we should be paralyzed by fear, just to keep our eyes open, because knowing the effects will always help us make better choices. Enjoy the evening.

P.S.: In case you are wondering, it is Jerzy the one who has trouble waiting for work to fall on his desk.