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INCENTIVES

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While economics is the social science dealing with the subject of scarcity, or more simply - the science of how people make choices, incentives are the things that guide those choices. Carrots, sticks, money, jail-time - incentives are the rewards and punishments that guide our behavior. 🥕

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Examples

*A Grades 💯

*Applause 👏

*Bonuses 💰

*Commissions 💰

*Cost 🧾
*Guilt 🥺

*Hunger 🍔
*Physical Force 👊

*Prison 🚔

*Salaries 💰

*Shame 😔

*Subsidies 💰

*Taxes 🧾
*Trophies 🏆
*Wages 💰

*Mom yelling at you. 😬

 

Economist Tyler Cowen says, incentives matter. He's right. Don't want to work? Ok. Wait until you get hungry. 

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The Beauty of Incentives

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One of the most cool things about incentives is how they organize society for us. While some people dislike tipping at restaurants, studies show it is slightly correlated with better customer service. As a society we also tend to dislike the idea of murder and theft 🚨 thus prison time is used to guide people away from those booboos. Taxes are used to raise revenue for government but they're also used to deter behavior like smoking or drinking. Then of course there are the grade based incentives that help motivate students to study hard 👩🏻‍💻 so that they can get into the best universities 👨🏻‍🎓 (which is much easier when you have a tutor). ​

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Unintended Consequences

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Incentives are often more powerful 💪 than we realize. Sales commissions can actually cause retail staff to forego boring but essential tasks like stocking shelves while they run 🏃 to new customers and try to make the sale. 

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When colonial governments paid for the killing of rats in Hanoi, entrepreneurs started rat farms to breed more rats (or cobras???) 🐍

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Humans, even politicians, are humans, and have less than perfect rationality. Nobody is perfectly intelligent and capable of seeing all the consequences of an incentive program. So stay humble while trying to incentivize people. 🏆​​

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This topic is vital for IB, IGCSE, A Level, AP Micro, AP Macro and HKDSE students. 

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