A Fine Point

A Fine Point

ESSA Admin
FinesEconomic disincentive
March 11, 2012

Edwina Economist is driving to an important meeting with her boss to discuss the prospects of her promotion. She is confident that she will get the promotion if she is punctual and relaxed. Unfortunately, she is running behind schedule. Edwina entertains the thought of speeding to 100km/h along a road with a limit of 80km/h – a road which she knows to have light traffic at this time of day and is monitored by speed cameras. This will get her to the meeting in just in time, and maximize her chance of promotion.

If she is punctual, her chances of gaining an equivalent $20,000 bonus are 90%. The fine she risks is $225. If she is late, her chances fall to 20%. The risk of death or serious accident preventing her arriving is 1.5% (assume she places no value on her life). Does she

a)     Speed

b)     Not speed

c)     Stop and call her boss to tell him that she’ll be late to the meeting

d)     Quit her job as an economist because her quality of life is evidently being lowered by her perpetual economic analysis of quotidian events

Edwina has an incentive to speed in this case as her benefits from speeding outweigh its costs. This analysis is not restrained to the hypothetical. People who can easily afford speeding fines, or who benefit disproportionately from speeding, have less of a disincentive to speed. A friend of mine once recalled going 90km/h+ on a suburban road (probably Toorak) in his dad’s Aston Martin. The effectiveness of any fixed-fine system will become diluted, the smaller the percentage of disposable income the fine is for an offender. This applies does not only apply to speeding fines, but can also apply to corporate penalties.

Now suppose Edwina Economist were Finnish. In Finland, as well as some other countries such as Sweden and Germany, speeding is controlled with day-fines. Fines are quantified in ‘days’ – one day being one-half of the daily disposable income of the offender. The smallest number of days is 1-day and the largest is 120-days, and the minimum fine for speeding is €115. Would this have curbed Edwina’s behavior more effectively? Perhaps (the economic answer).

The day-fine, introduced in Scandenavia in the 1920’s and 1930’s, sought to provide more equitable punitive impact for traditionally fixed-fine transgressions. This works at both ends of the spectrum: those who are poorer are fined more within their means, discouraging judges to waive fines due to fear of nonpayment; the incentives of the wealthier are positioned more in line with the average person. Of secondary importance was to improve the usability of fines for more serious crimes.

This method of fining can produce extraordinary results. In 2009 a businessman was fined €112,000 for speeding at 82km/h in a 60km/h zone. The absurdity of fines such as these has prompted some lawmakers in Finland to ask whether their egalitarian spirit has crossed the line. Leena Harkimo, a lawmaker in the Finnish Parliament has said, “People are equal before the law whatever their color, age, or sex, and so they should be when it comes to wealth.”

So as an economic disincentive, is a system based percentage of disposable income more effective at deterring aberrant behavior? At this point in time, one begins to make the connections in one’s head – percentage; income; aberrant. Might day-fines and progressive taxes have anything in common? Firstly, both were introduced to increase equality – one for punitive equality and the other for income equality. More importantly, both can be argued to be effective economic disincentives – one for speeding and the other for working. The merits of a progressive tax system will be saved for another time.