Econ-ity » June 20, 2014

Daily Archives: June 20, 2014

Irony of regulation mishaps: being victim to “The Cobra Effect”

government regulationDo regulations always work? Not necessarily.  Can regulations actually make the problem at hand worse? Absolutely.

It is no surprise that government policies do not always bring out the desired consequences, but it is definitely fascinating to see how those policies can sometimes downright backfire. Human behavior is unpredictable and often times driven by self-interest. Hence, people are quick to find ways to beat the system. Policy makers who ignore this basic foundation of human behavior while making regulatory decisions might likely find themselves prey to “The Cobra Effect”.

Cobras had become a growing problem for British officials in India during the colonial era. To solve this problem, a bounty was offered for every dead cobra. However, entrepreneurial locals were quick to see an opportunity for profit and started farming these poisonous snakes. When the government got a whiff of this, the bounty was cancelled and numerous now useless cobras were released in the open thus making the initial problem worse. Hence came the name: “The Cobra Effect” which explains the event whereby an attempt to solving a problem makes the problem even worse.

A similar incident occurred in Bogotá, Colombia where the government’s attempt to control traffic and check pollution by allowing number plates with only certain last numbers run in the streets on certain days,  failed miserably. Following the rule, people in Bogotá started buying additional cars and most of these replacement vehicles were old and not environment friendly. This rule did not stop people from using private vehicles on a daily basis, but definitely did increase pollution. More examples from round the world can be found here.

Now let’s look at examples much closer to home:

Of course I can afford to kill you!

In an attempt to curb road accidents and fatality, the Government of Nepal set NRs. 18,000 compensation for every death resulting from a road accident and fulfillment of lifelong medical expenses in case of injuries by the offender. The value of a human life cheaper than a 21 inch LED TV! What happened next is sadly something we all know too well. Instead of reduced reckless driving, drivers of public transportation vehicles purposely ran over and killed any surviving victims in accidents so that they could just pay the low compensation for death instead of covering massive hospital bills. This disastrous regulation was removed and replaced by a compulsory third party insurance system; however by then numerous lives which could have otherwise been saved, were already lost.

Simple Math!?

One of the major reasons for a mammoth vehicle tax of 241% in Nepal, is revenue generation through the so-called “luxury items”. This has resulted in majority of the people only being able to afford two wheelers which are inherently unsafe and have caused thousands of deaths every year. Speaking purely in terms of revenue, reducing the tax percentage by even just half the current rate would dramatically increase the pool of people who would be able to afford vehicles. It is very likely that vehicle purchases would more than double and revenue collected in terms of taxes would increase many folds! Whether or not the government can then properly utilize the resources to improve the roads to facilitate those extra vehicles is a whole different story. However, the bottom line is: The government is losing out on revenue by setting exorbitant tax rates and its reduction would be a win-win for both the government treasury and the general public!

The irony of it all

Time and again government regulations that emerge to help have failed us; some even to the point of losing lives.  Unintended consequences are a huge threat to policy making and analyzing each possible scenario before implementing any regulation is extremely important. Be it looking at all proposals from lobby groups with a reasonable doubt or pushing hard to think out of the box; trying to identify these inadvertent results is definitely key to reducing these mishaps. Although it is impossible to predict actual results, the power of keeping an open eye through effective follow up and monitoring does lie with the regulators.  Thus, allowing something like burdensome tax regimes to motivate people to dodge taxes, foster bribery and discourage enterprises from entering the formal market for decades is pure folly. Do we have more well-meaning disasters in store for us? Only time will tell!

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Researcher at Samriddhi Foundation with an interest in good governance. She is a graduate student at Heinz College, Carnegie Mellon University in Pittsburgh, Pennsylvania, pursuing a Master of Science degree in Public Policy and Management. She also has a Bachelor of Arts Degree in Economics and Statistics with a minor in Complex Organizations from Mount Holyoke College, South Hadley, Massachusetts.

Published by: