Incentives in Action

A nice example of incentives in action from Jason Furman speaking at the World Bank (based on a good GAO report):

Prior to the [2009] law’s enactment, the tax rates on roll-your-own tobacco and pipe tobacco were the same. After the law’s enactment, the tax rate on roll-your-own tobacco was over $20 per pound higher than the tax on pipe tobacco. And, as you can see in the figure below, sales of roll-your-own tobacco plummeted after the law and sales of pipe tobacco increased by a factor of ten.

Hat tip: Justin Wolfers.