Sunday, 30 August 2009

Law, policy, perverse incentives and individualism

The problem with many laws and policies is that they create perverse incentives and require further laws and policies to patch them up and these laws and policies may create perverse incentives...

So when designing laws and policy, we need to identify all the things society wants to achieve, and what all perverse incentives.

For example:

To ensure equality we may wish that there is no ownership of land (which is the only thing that doesn't depreciate or expire). But we also want land and the buildings on them to be maintained and no damage done.

The individual's incentive to own land is to make profit through both use and appreciation. The individual's incentive to maintain assets is linked to the ability to make profit from them.

So against these criteria for achievement and these individual's incentives we could perhaps: tax profit (after inflation) on the sale of land at 100%; annually tax land in proportion to area or perhaps value extracted (e.g. for mineral extraction); and fine people for polluting land. Individuals still have incentive to maintain buildings as tax on profit would be at a lower rate, allowing personal gain.

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