2.11 The law of unintended consequences

Question 1

What is the law of unintended consequences?

Answer 1

It refers to situations where government intervention leads to unexpected or unintended effects, often making the original problem worse.

Question 2

Why do unintended consequences happen?

Answer 2

Because governments may lack full information, markets are complex, and people or firms may change their behaviour in response to the policy.

Question 3

Give an example of an unintended consequence of taxation.

Answer 3

A sugar tax may reduce soft drink sales but increase consumption of other unhealthy substitutes

Question 4

How can regulation lead to unintended consequences?

Answer 4

Strict environmental regulations may increase business costs, leading to higher prices or firms relocating to less regulated countries (carbon leakage).

Question 5

give an example for a substitute product

Answer 5

vapes were introduced to stop smokers smoking. vapes are now a problem in society and an unintended consequence.people who don’t/ never smocked use them. Just led to an increased strain on NHS and led to more negative externalities.

plastic vapes banned due to environmental impact

Question 6

What is a real-world example of unintended consequences?

Answer 6

Rent controls meant to help tenants may reduce landlord investment, leading to worse housing quality and shortages.

Question 7

How does the law of unintended consequences relate to government failure?

Answer 7

Unintended consequences are a cause of government failure, where intervention leads to inefficient outcomes or worsens the problem.

Question 8

How can governments reduce the risk of unintended consequences?

Answer 8

• trial policies with pilot schemes
• improve date and forecasting
• consult with stakeholders
• use impact assessments

Question 9

What should economists consider when evaluating intervention?

Answer 9

They must assess both intended effects and possible unintended outcomes to determine whether intervention is effective and proportionate.

Question 10

a shadow market can be an unintended consequence. how?

Answer 10

shadow markets develop to undermine an official policy
illegal or unregulated markets emerge to meet demand- this is an unintended outcome.

e.g.
Cigarette Taxes
High tobacco taxes → black market smuggling of untaxed cigarettes
Gov loses tax revenue, and unsafe products may enter the market.

Rent Controls
Landlords may illegally charge extra fees or take payments “off the books”
Reduces housing quality and availability.

Banning Goods (e.g. drugs, alcohol)
Demand still exists → black market supplies it
Encourages criminal activity and lack of quality control.