Friday, March 20, 2009

Rewarding bad behaviour

One of the main functions of government is the redistribution of wealth. However, governments also have the luxury of promoting social goals through the incentives offered to both the contributors, and the beneficiaries of this redistribution.

However, the unfortunate problem is that much government intervention rewards 'bad' behaviour.

Let me explain.

A progressive tax system conveys the principle of vertical equity; that those with a greater ability to pay should pay more. However, if you look at this from a slightly different perspective, you are simply punishing the good behaviour of highly productive people. The reverse of this is rewarding people for not working through unemployment benefits.

Don't get me wrong, I believe that these two problems are minor in comparison to the benefits such a welfare structure brings to society. But what about other more controversial ways to use taxes and subsidies?

In the water industry there have been plenty of subsidies lately in both and urban and rural context. In the city, households are given free water tanks and free toilet and shower fittings to promote more efficient use of water. In the country, there is a rural water use efficiency program that essentially subsidises farmers to invest in more efficient irrigation methods.

If you think critically about this you see the perverse incentives. Those households who are already efficient, who already have efficient fittings, get nothing. Those wasteful households who have done nothing to conserve water now get a whole bunch of free stuff. The same applies in the country. Those irrigators who already use more efficient techniques get nothing while those who have caused the water problems by using outdated irrigation methods get subsidised sprinklers.

Rewarding bad behaviour has been happening with the subsidisation of energy efficient lightbulbs, solar hot water, and other 'energy saving' gadgets. Those people who have already spent their own hard earned cash on such things get nothing, while the slackers get some them all for free.

It is equally as bad with the advent of proposed trading schemes for both water and emissions. Those companies and individuals who already use the most water or energy efficient technology have little scope to adapt. Those who use outdated and inefficient technology now get incentives for them to invest in new technology. They also get rewarded with more permits due to their higher historical emissions or water use.

The question that remains is how to overcome these incentives. Well I for one have a view that the water and energy efficiency subsidies are ineffective anyway, so the easiest thing to do is scrap them. For the cap and trade systems, which I believe are currently the best way to deal with finite renewable resources (and for sustainable levels of emissions/pollution), it is a more difficult question. You could, for example, gift permits at the beginning of the scheme inversely related to previous use. The more they have used, the fewer permits they get. But determining an actual measure for this over a vast array of businesses of different scales and different industries seems close to impossible.

I am open for suggestions on how to overcome these issue, and for any other examples of well intentioned policies rewarding bad behaviour.


  1. I don't have an answer as good as your article but it seems that it would make sense to the general populous that the bad guys get taxed to the extent of their wrong doings. Then wouldn't there be heaps of money to reward those that did originally do the right thing and use their hard earned money to kick off the change.

  2. Portalpie,

    That's the general idea, but there is a lot of contention about what is 'good', and also there are plenty of ways to take advantage of the system. For example, is the more efficient guy 'better' for society, or is the efficient technology being used enabling resource consumption that could not otherwise have occurred with old technology?

    So many questions...