Photo: Kamainv. Source: Wikimedia
That’s my favorite economic question to ask when I’m looking at a new proposal. Everyone with a business plan will outline their actions and the intended consequences of their enterprise. Uber has a plan to facilitate “ride sharing,” where folks with some extra time and access to a car can earn a few dollars by “sharing” a ride with someone they connect with on their cell phones.
But there are always unintended consequences, too. One of the side-effects has been full cell phone lots at big city airports – those formerly small, quiet spaces where you could wait for a friend to retriever her luggage. Now – unless they get shooed away – the cell phone lots are full of Uber drivers waiting for travelers to arrive and call for a ride.
British colonial authorities had experience with this kind of second-order effect. When the British Raj in India became concerned about the prevalence of venomous snakes, they offered to pay residents for turning in dead cobras. Industrious Indians recognized a new source of revenue, and began breeding cobras to supplement their income. When the rulers understood what was happening, they scrapped the program, and the cobra breeders set the now-worthless snakes free. A well-intentioned program that backfires and makes the problem worse is called a “Cobra Effect.”
Unintended consequences can be positive, as when clear-cutting a hardwood forest diversifies the landscape and generates additional habitat for various animals, or when an architectural and planning error in a bell-tower in Pisa, Italy created a tourist attraction. It’s impossible to anticipate every new development. But trying to understand second-order and third-order consequences is critical.
Photo: Saffron Blaze. Source: Wikimedia
Because if we don’t think about these effects, the market will.
Douglas R. Tengdin, CFA