Question

When speeding tickets were $$\$ 100$$, usually 500 speeders were on the roads each month in a given city; when ticket prices were raised to \(\$ 250\), usually 215 speeders were on the roads in the city each month. Can you find any economics in this observation?

Short answer

Yes, there is an economic observation. When the cost of speeding tickets increased, the number of speeders decreased. However, since the decrease in speeders is less than the increase in ticket cost, this means the demand for speeding (odd as it might sound) is inelastic to changes in the price (the fine).

Step-by-step solution

Calculate Percentage Change in Ticket Price

First calculate the percentage increase in the ticket price. This is computed as ((New price - Old price) / Old price) x 100%. Here, new price is \$250 and old price was \$100. So, the change is ((250 - 100) / 100) x 100% = 150%.

Calculate Percentage Change in Number of Speeders

Next, calculate the percentage decrease in the number of speeders. This is computed as ((Old number - New number) / Old number) x 100%. Here, new number is 215 and old number was 500. So, the change is ((500 - 215) / 500) x 100% = 57%.

Make the Economic Observation

With the ticket price increasing by 150% (an economic deterrent), the number of speeders on the road decreased by 57%. This shows that the higher the cost (fine), the lower the behavior (speeding). This is an example of demand elasticity. But since the decrease in speeders (57%) is less than the increase in ticket cost (150%), the demand in this case is inelastic.

Key concepts

Inelastic Demand

Inelastic demand refers to situations where changes in price result in relatively small changes in the quantity demanded. This characteristic of inelastic demand occurs when consumers do not significantly change their consumption patterns in response to price changes. The example of speeding fines shows inelastic demand. When the price of speeding tickets increased by 150%, the number of speeders reduced by only 57%. This disparity indicates that speeding behavior is not highly sensitive to price changes.

The reasons for inelastic demand can vary. Sometimes, the goods or services in question are viewed as necessities, where alternatives are limited. In other situations, consumer habits or behavioral deterrents can play a role. Here, it seems the deterrence aspect of increased fines did not vastly alter behavior, underscoring inelasticity.

To deepen understanding, consider other examples of inelastic demand, such as essential goods like gasoline or medications. These goods often face minimal changes in quantity demanded even with significant price hikes.

Price Elasticity

Price elasticity measures how responsive the quantity demanded of a good is to a change in its price. It is an important concept in understanding consumer behavior, pricing strategies, and revenue predictions. Price elasticity is calculated using the formula:\[\text{Price Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}\]In the context of speeding fines, the price elasticity of demand is calculated using the decrease in the number of speeders and the increase in ticket prices. With a 150% increase in fines causing only a 57% decrease in speeders, the elasticity value is less than one, indicating inelastic demand.

Understanding price elasticity helps policymakers make informed decisions when setting fines or taxes. For businesses, knowing the price elasticity of their products aids in strategic pricing, balancing revenue and customer retention.

Economic Deterrents

Economic deterrents operate by discouraging unwanted behaviors through financial penalties or incentives. The case of increased speeding fines serves as a classic example. When fines rose from $100 to $250, using the economic deterrent strategy aimed at reducing speeding offenses.

For deterrents to be effective, they must significantly impact individuals’ cost-benefit analysis. If a deterrent such as a fine leads to substantial behavior change, it is considered effective. However, when the response to a fine is limited, as in the speeding case, reevaluation of the deterrent's magnitude and method could be necessary.

Deterrents can apply to various arenas beyond traffic laws, including pollution controls, smoking bans, or tax avoidance. The key is finding the right balance where economic deterrents are strong enough to modify behavior without being excessively punitive, thus achieving the desired outcome efficiently.