Means testing fines: economic efficiency, or unjust policy.

As recently reported, European nations are increasingly pegging speeding fines to income levels, in an attempt to standardise punishment for such infringements.

The intuition is simple: a $100 fine to a person of wealth in excess of a billion dollars is trivial. Clearly, there is no (or at the least little) incentive to curb one’s behaviour.

However, in examining a recent USD $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland,  one cannot help but feel this is somewhat excessive.

Conversely, it would seem that such laws have the potential to induce ridiculously low penalties to those without any assets. Is New Zealand society willing to burdening the rich with the external risks created by the poor?

  • http://www.tvhe.co.nz Matt Nolan

    “As recently reported, European nations are increasingly pegging speeding fines to income levels, in an attempt to standardise punishment for such infringements.

    The intuition is simple: a $100 fine to a person of wealth in excess of a billion dollars is trivial. Clearly, there is no (or at the least little) incentive to curb one’s behaviour.”

    I would say that the purpose of such a scheme is to ensure that the “loss of welfare” associated with committing the act is equal no matter the wealth level. If we assume that the wealthy have a lower opportunity cost of income (the same justification used for progressive taxation) then this seems fairish.

    Such a policy has be be justified on “equity” grounds methinks.

    “Conversely, it would seem that such laws have the potential to induce ridiculously low penalties to those without any assets. Is New Zealand society willing to burdening the rich with the external risks created by the poor?”

    If the purpose of the policy is to make the “welfare cost” of the crime income neutral, how can we say that the penalties are ridiculously low for the poor?

  • http://tvhe.co.nz The Hand

    @Matt Nolan

    “I would say that the purpose of such a scheme is to ensure that the “loss of welfare” associated with committing the act is equal no matter the wealth level. If we assume that the wealthy have a lower opportunity cost of income (the same justification used for progressive taxation) then this seems fairish.”

    Agreed; certainly an ordinal approach (over a cardinal one) will be more effective in delivering equitable outcomes.

    However, at some point there must exist an upper (or lower) bound.

    At what point does a ordinal approach become “unfair”?

  • http://www.tvhe.co.nz Matt Nolan

    @The Hand

    That is why I stated that the perceived target of the policy is to ensure that the welfare cost to the individual is income neutral. Given this we could say whether the target “too high” or “too low” in terms of fairness – but we need to define this starting point, instead of just pointing out that a failure could occur.

    Personally, welfare economics hurts my head – as I barely understand how to rank my own preferences, let alone everyones. But the Europeans are pretty keen on it ;-)

  • http://tvhe.co.nz The Hand

    @Matt Nolan

    What is perhaps the most interesting paradigm within such legislation (this has only just occurred to me), is that such a policy is proof of the irrationality of society.

    Clearly, as witnessed above, the preferences of society as a whole (under such legislation) are highly irrational in the sense that they assign significantly different values to same action based upon the causation agent.

    Clearly this is only logical if there exists some form of externality within the causation agent’s behaviour…

  • http://www.tvhe.co.nz Matt Nolan

    @The Hand

    Irrationality? It is just a function of the social welfare function, it isn’t irrational persee – it would just seem unfair when an individual with a different welfare function looks at it.

    Note that in this case society wants each agent to face the SAME cost in terms of lost utility, which I think is understandable for a social welfare function.

    In this specific case, however, I think looking at income levels is a poor way of estimating the relative utility loss for two reasons:

    1) Annual income is not necessarily a good proxy for lifetime wealth,
    2) People with higher incomes often earn more because they are willing to sacrifice other things/work harder/work longer – this illustrates that their marginal utility of income is (for the same level of income) higher than other peoples.

    Even so, if people can justify targeting income, I can see where the welfare considerations of this policy come from.

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  • RossM

    I see a bit of a slippery slope here. If we propose to fine wealthy people more on the grounds they are rich and can afford it, thus equalising the welfare loss across income groups, how are we going to allocate time in jail?

    Could it be assumed that a wealthy person would be horrified to be put in jail and so a one week sentence might suffice, whereas for a homeless person in winter, jail may well represent a significant improvement in welfare, making a sentence of several months equivalent in welfare loss terms to the rich person’s week in jail?

  • http://www.tvhe.co.nz rauparaha

    Greg Mankiw:
    “We fine activities that have negative externalities, such as putting others at risk. If X is the size of the externality, and p is the probability of being caught, then the optimal fine is X/p. That will give people the right incentive to produce the optimal quantity of the externality. Under this policy, the rich may choose to speed more, but that is optimal.
    [but]
    On further reflection, however, I think a case can be made, at least theoretically, to support the judges’ ruling. First, assume that the negative externalities are very great, so the optimal quantity of the externality is about zero. By itself, that argues for a large fine, not a wealth-dependent one. But then add another assumption: Suppose there is some small probability that an innocent person will be found guilty because of a rogue, or simply a mistaken, policeman. This possibility, together with risk aversion, would induce us to temper how large the fine is. And this tempering of the large fine would seem to be less for richer taxpayers: Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders.”

  • http://www.tvhe.co.nz Matt Nolan

    @RossM

    If we wanted to allocate punishments for crimes based on welfare lost then sure.

    However, that is why we have to have such a strong burden of proof on any policy that treats people differently – as we need to show that the welfare consequences are different. This is of course a wildly big and difficult task in practical terms.

    That is why welfare economics and ethics hurt my head and I prefer to stick to the more objective areas of economics.

  • http://www.tvhe.co.nz rauparaha

    @RossM
    Yes, if we want to equalise the utility loss for equitable reasons then that would be true. I don’t think it’s a slippery slope at all, though; it’s just a logical consequence of equalising the utility cost across heterogeneous agents.

  • http://www.tvhe.co.nz rauparaha

    @Matt Nolan
    Hahaha, did you manage to write that with a straight face, Mr Macro Forecaster? :P

  • http://www.tvhe.co.nz Matt Nolan

    @rauparaha

    Interesting stuff. And doesn’t require a random social justice element such as “society wanting people to suffer equivalent welfare costs for a crime”.

  • http://www.tvhe.co.nz Matt Nolan

    @rauparaha

    Macro forecasting still has elements of objectivity – I’m just trying to look at how little variables run around instead of saying how said variables should be distributed :P

  • Moz

    “ridiculously low penalties for those with no income” most probably means beneficiaries. Since they’re already well below the poverty line, arguably they can’t reasonably be punished any further. Since they also mostly value future benefits and costs much less than the average employed person, the fine has to be either immediate (trivial to corrupt) or ridiculously beyond their ability to pay (imposing an indefinite but small benefit cut has little effect other than acting as a massive tax on extra income and thus an incentive to stay on the benefit) Not that those arguments have any traction with government, but from an ethical point of view I think they do. So you’d need to argue purely from a deterrent effect, and also take into account the reasons for the offence.

    For instance, failing to attend a job interview = loss of benefit. Getting caught driving an unlicensed vehicle is less likely, thus a preferable course of action. Even to a somewhat dim unemployed person, let alone a smart one.

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    I agree with the “upper bound” theory. I wouldn’t charge more than 5,000 for a speeding ticket. The idea of making tickets easier to pay for the economically disadvantaged, I like.

  • http://modelsinhats.weebly.com/ Julia

    “However, in examining a recent USD $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland, one cannot help but feel this is somewhat excessive.”

    Please explain your reasoning. A speeding ticket represents a serious health risk, both to the driver and other drivers and pedestrians. A fine must be punitive; if you’re a millionaire you’re not going to care about a $10,000 fine (especially if you’re a speed freak that is a professional sports car driver.)

  • http://www.giornaledellasera.com/ Chris

    I don’t think it is ethical, well that’s just my opinion.

  • kudret

    Thanks. (kudret)

  • steve

    Its simply the diminishing marginal utility of wealth. clearly wealthy people are on a different part of the utility curve so a greater fine is required for the same change in utility. There should be no upper or lower bound.

    The problem now though is the right incentives for the law enforcers who have an incentive to catch the wealthy, but little incentive to catch the poor.

  • Robbie

    @The Hand

    “However… one cannot help but feel this is somewhat excessive.”

    Why? If we accept the logic that fines should be a function of wealth, or income or whatever, wouldn’t this be the logical extension of that?

    “Conversely, it would seem that such laws have the potential to induce ridiculously low penalties to those without any assets. ”

    Even in the absence of the sting of financial penalties, losing a licence will affect all drivers.

    Another interesting technique for reducing speeding is demerit points. Italy used the insight that we dislike losses more than we like gains by awarding everyone 20 demerit points and subtracting them when you infringe the law (by contrast in NZ and most other juristictions you count up towards some barrier at which you lose your licence). This apparently led to a decrease in traffic infringements.

    From ‘Nudge’ by Richard Thaler and Cass Sunstein

  • http://www.selectyourfranchise.com Franchises UK

    On the one hand I can see the rationale in that what will someone on a high income care about a fine that is loose change to them while those on a low income have to scrape together money to pay it. Its more fair in one sense that the fine is relative to income.

    On the other hand (as steve pointed out) does it indeed create an underhanded opportunity for police to pursue high income individuals because of the extra revenue they will generate for themselves! (the morale of this being if you are rich better drive a clapped out mini to not be obvious lol)

    This hasn’t happened in the UK (yet!!) But either way… if you get enough points you lose your license and can’t drive whether you are rich or poor. I see that as incentive enough.