The Hindu Business Line : Economics of honesty

Petrol bunks in Canada are self-service stations. You fill petrol and pay by credit-card or walk into the station and pay the attendant. If there are several cars at the station, it can be difficult for the attendant to catch a driver who speeds away without paying. And yet the system works well. Why are people honest? Economics can throw some light on this subject.

People follow a system if there is incentive to do so. You may pay your taxes on time if the Income-Tax Department were to give you a 10 per cent discount on the total tax payable!

Alternatively, a system would work well if people are punished for cheating. Suppose the Income-Tax Department were to pass an order that those do not pay taxes properly will be sentenced to prison for five years and did indeed execute the order. Would you at all consider evading taxes?

It is the same argument with the gas stations in Canada. The desire to cheat is defeated due to fear of punishment. You may be prosecuted if you are caught. And that has its consequences.

You will have a criminal charge against you that will be reflected in your record when you apply for a job, transact business or apply for a CFA charter. Surely, no Canadian would want to pay such a high price for a few litres of petrol. In effect then, stealers become good economists, as they weigh the pros and cons of cheating. Of course, this does not mean that all Canadians are honest. There may be occasional ones who risk being caught. These are the one who do not understand economics!

(The author is based in Surrey, BC in Canada.)

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