8 PART ONE INTRODUCTION in road conditions-by faster and less careful driving. The end result of a seat belt law, therefore, is a larger number of accidents How does the law affect the number of deaths from driving? Drivers who wear their seat belts are more likely to survive any given accident, but they are als more likely to find themselves in an accident. The net effect is ambiguous. More- over, the reduction in safe driving has an adverse impact on pedestrians(and on drivers who do not wear their seat belts). They are put in jeopardy by the law be- cause they are more likely to find themselves in an accident but are not protected by a seat belt. Thus, a seat belt law tends to increase the number of pedestrian At first, this discussion of incentives and seat belts might seem like idle spec ulation. Yet, in a 1975 study, economist Sam Peltzman showed that the auto-safety aws have, in fact, had many of these effects. According to Peltzman's evidence these laws produce both fewer deaths per accident and more accidents. The net re of pedestrian deaths Peltzman's analysis of auto safety is an example of the general principle that people respond to incentives. Many incentives that economists study are more straightforward than those of the auto-safety laws. No one is surprised that people drive smaller cars in Europe, where gasoline taxes are high, than in the United States, where gasoline taxes are low. Yet, as the seat belt example shows, policies can have effects that are not obvious in advance. When analyzing any policy, we must consider not only the direct effects but also the indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior QUICK QUIZ: List and briefly explain the four principles of individual HOW PEOPLE INTERACT The first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. The next three principles concern how people interact with one another PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF You have probably heard on the news that the Japanese are our competitors in the world economy. In some ways, this is true, for American and Japanese firms do produce many of the same goods. Ford and Toyota compete for the same cus- tomers in the market for automobiles. Compaq and Toshiba compete for the same customers in the market for personal computers Yet it is easy to be misled when thinking about competition among countries Trade between the United States and Japan is not like a sports contest, where one8 PART ONE INTRODUCTION in road conditions—by faster and less careful driving. The end result of a seat belt law, therefore, is a larger number of accidents. How does the law affect the number of deaths from driving? Drivers who wear their seat belts are more likely to survive any given accident, but they are also more likely to find themselves in an accident. The net effect is ambiguous. More￾over, the reduction in safe driving has an adverse impact on pedestrians (and on drivers who do not wear their seat belts). They are put in jeopardy by the law be￾cause they are more likely to find themselves in an accident but are not protected by a seat belt. Thus, a seat belt law tends to increase the number of pedestrian deaths. At first, this discussion of incentives and seat belts might seem like idle spec￾ulation. Yet, in a 1975 study, economist Sam Peltzman showed that the auto-safety laws have, in fact, had many of these effects. According to Peltzman’s evidence, these laws produce both fewer deaths per accident and more accidents. The net re￾sult is little change in the number of driver deaths and an increase in the number of pedestrian deaths. Peltzman’s analysis of auto safety is an example of the general principle that people respond to incentives. Many incentives that economists study are more straightforward than those of the auto-safety laws. No one is surprised that people drive smaller cars in Europe, where gasoline taxes are high, than in the United States, where gasoline taxes are low. Yet, as the seat belt example shows, policies can have effects that are not obvious in advance. When analyzing any policy, we must consider not only the direct effects but also the indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior. QUICK QUIZ: List and briefly explain the four principles of individual decisionmaking. HOW PEOPLE INTERACT The first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. The next three principles concern how people interact with one another. PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF You have probably heard on the news that the Japanese are our competitors in the world economy. In some ways, this is true, for American and Japanese firms do produce many of the same goods. Ford and Toyota compete for the same cus￾tomers in the market for automobiles. Compaq and Toshiba compete for the same customers in the market for personal computers. Yet it is easy to be misled when thinking about competition among countries. Trade between the United States and Japan is not like a sports contest, where one