Incentive schemes can solve difficult problems – or fail spectacularly.
It was during the time of colonial India when a peculiar problem arose for the British government. They were concerned that there were far too many venomous cobra snakes in Delhi. Seeing themselves as generous and clever rulers, they looked for a way to destroy this pest for good without getting their hands dirty. A clever incentive scheme was implemented: a bounty. For every cobra that was killed and brought to the government, a cash reward would be offered. It was genius. Cobras were killed. People were paid. Success. Until the officials noticed something strange happening: the population of the cobras was increasing, not decreasing. Why?
By offering cash for the cobras the government had created a demand for the snakeskin, and where there is a demand, supply will follow. On investigation, the British discovered several farms around Delhi that were breeding the snakes due to the income that the dead cobras were generating. The officials quickly ended the scheme, but the damage had already been done. In fact, the problem was now much worse than before. With the demand suddenly gone, cobra breeders held hundreds of worthless snakes. They only had one option – set them free. Delhi was re-invaded by cobras – giving us what we now know as the Cobra Effect.
The Cobra Effect occurs when an attempted solution to a problem manages to make the situation worse than before. Economists call this by another name: government failure. This is not the only instance of government failure via an ill-conceived bounty scheme. A similar situation occurred in French colonial Hanoi where there was a particular rat infestation and a reward for each rat tail was offered – similar to that for the cobras in India. However, tailless rats were soon seen scuttling through the streets of Hanoi by the dozen, illustrating a staggering increase in the rat population which was precipitated by citizens breeding rats to hand in to the government.
But governments can get things wrong in other ways. In Mexico City, an attempt to reduce air pollution from exhaust manifested itself in a ban on cars with certain number plates from driving on certain days (for example plates ending in 5 and 6 were banned on Monday, 7 and 8 on Tuesday etc). However, instead of drastically improving the air quality, there was very little change, with some reports suggesting that it became even worse. Rather than turning to public transport as had been predicted, many citizens instead decided to buy another car that could be driven on the banned day. However, most of these vehicles were old, cheap and second-hand; they caused more pollution than modern cars and made a well-intentioned scheme backfire terribly.
So why exactly did these schemes not work? As it turns out, all of these attempts failed to harness the power of incentives, which in turn led to government failure.
Understanding incentives is the key to understanding the Cobra Effect. As Steven Levitt, co-author of the Freakonomics book series puts it, “an incentive is a bullet, a key: an often tiny object with astonishing power to change a situation”; and for the Cobra Effect, considering all of these keys is crucial.
The key to solving the Cobra Effect and avoiding government failure is to consider all the possible incentives that could come into play when implementing a scheme. Otherwise, as observed in the examples given, just implementing the obvious solution does not mean an incentive scheme can be successful. By assessing all the incentives and their knock-on effects, the unintended consequences might be avoided.
Yet, just because a government might fail with one of their plans doesn’t mean that they shouldn’t act at all. Even if the British, French and Mexicans did all fail rather spectacularly in their plans, the cost of inaction has the potential to be even worse than implementing an ill-fated plan. After all, simply ignoring a problem has rarely ever solved it.