Naked Economics: Undressing the Dismal Science pdfdrive com

CHAPTER
2

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Incentives Matter:
Why you might be able to save your face by cutting off your nose (if
you are a black rhinoceros)
T
he black rhinoceros is one of the most endangered species on the planet. Some
4,000 of them roam southern Africa, down from about 65,000 in 1970. This is an
ecological disaster in the making. It is also a situation in which basic economics
can tell us why the species is in such trouble—and perhaps even what we can do
about it.
Why do people kill black rhinos? For the same reason they sell drugs or cheat
on their taxes. Because they can make a lot of money relative to the risk of
getting caught. In many Asian countries, the horn of the black rhino is believed
to be a powerful aphrodisiac and fever reducer. It is also used to make the
handles on traditional Yemenese daggers. As a result, a single rhino horn can
fetch $30,000 on the black market—a princely sum in countries where per capita
income is around $1,000 a year and falling. In other words, the black rhino is
worth far more dead than alive to the people of impoverished southern Africa.
Sadly, this is a market that does not naturally correct itself. Unlike
automobiles or personal computers, firms can’t produce new black rhinos as they
see the supply dwindling. Indeed, quite the opposite force is at work; as the
black rhino becomes more and more imperiled, the black market price for rhino
horn rises, providing even more incentive for poachers to hunt down the
remaining animals. This vicious circle is compounded by another aspect of the
situation that is common to many environmental challenges: Most black rhinos
are communal property rather than private property. That may sound wonderful.
In fact, it creates more conservation problems than it solves. Imagine that all of
the black rhinos were in the hands of a single avaricious rancher who had no
qualms about making rhino horns into Yemenese daggers. This rancher has not a
single environmental bone in his body. Indeed, he is so mean and selfish that
sometimes he kicks his dog just because it gives him utility. Would this ogre of a
rhino rancher have let his herd fall from 65,000 to 4,000 in thirty years? Never.
He would have bred and protected the animals so that he would always have a
large supply of horns to ship off to market—much as cattle ranchers manage
their herds. This has nothing to do with altruism; it has everything to do with
maximizing the value of a scarce resource.
Communal resources, on the other hand, present some unique problems. First,
the villagers who live in close proximity to these majestic animals usually derive

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no benefit from having them around. To the contrary, large animals like rhinos
and elephants can cause massive damage to crops. To put yourself in the shoes
of local villagers, imagine that the people of Africa suddenly took a keen interest
in the future of the North American brown rat and that a crucial piece of the
conservation strategy involved letting these creatures live and breed in your
house. Further imagine that a poacher came along and offered you cash to show
him where the rats were nesting in your basement. Hmm. True, millions of
people around the world derive utility from conserving species like the black
rhino or the mountain gorilla. But that can actually be part of the problem; it is
easy to be a “free rider” and let someone else, or some other organization, do the
work. Last year, how much time and money did you contribute to preserving
endangered species?
Tour and safari operators, who do make a lot of money by bringing wealthy
tourists to see rare wildlife, face a similar “free rider” problem. If one tour
company invests heavily in conservation, other tour companies that have made
no such investment still enjoy all the benefits of the rhinos that have been saved.
So the firm that spends money on conservation actually suffers a cost
disadvantage in the market. Their tours will have to be more expensive (or they
will have to accept a lower profit margin) in order to recoup their conservation
investment. Obviously there is a role for government here. But the governments
in sub-Saharan Africa are low on resources at best and corrupt and dysfunctional
at worst. The one party who has a clear and powerful incentive is the poacher,
who makes a king’s ransom by hunting down the remaining rhinos, killing them,
and then sawing off their horns.
This is pretty depressing stuff. But economics also offers at least some insight
into how the black rhino and other endangered species can be saved. An
effective conservation strategy must properly align the incentives of the people
who live in or near the black rhino’s natural habitat. Translation: Give local
people some reason to want the animals alive rather than dead. This is the
premise of the budding eco-tourism industry. If tourists are willing to pay great
amounts of money to spot and photograph black rhinos, and, more important, if