Incentives: A Closer Look

Anel Negrete Honorbound –

Throughout this course, we have asked many questions, whether they be simply with a clear answer or a more thought out with a complex answer. One of those questions included, what are incentives? Incentives can be defined, according to the dictionary definition, as something that encourages or motivates someone to do something, whether it be for personal or social interest is each individuals concern. This can lead to positive outcomes and prosperity in the economy and environment as well as in the environment. Even though this is true, human behavior is extremely complex, which can lead to complex outcomes that may not have a positive effect. This is called preserve incentives which “are the inadvertent incentives that can be created when we set out to do something completely different.” In simpler terms, this is where good intentions lead to bad outcomes [1].

This is something I never took into consideration or even acknowledged about how people made choices and how they maximize their utility. Every person that makes a choice makes that choice with some sort of incentive, but people have to be careful and make sure these incentives don’t become perverse incentives. One example of a perverse incentive causing a perverse consequence is when parents give their child candy to clean the mess in their room. The child cleans and the parents reward them with a piece of candy. The problem is no the child will start to make a mess when they want candy. An example of perverse incentives in the government is when doctors spend less time trying to talk to the patient about what the problem seems to be, but spends more time ordering test after test in order to figure out the cause of the problem. This is because health insurance like Medicare or Medicaid have high reimbursement rates for diagnostic test rather than just talking to a patient [2]. The doctors’ incentives are to be reimbursed for a greater amount of money.

How do incentives help the market? An example that was brought up in class often was the production of corn. If farmers are growing corn, but they have no incentive to produce more than a certain amount, the government offers subsides in order for then to start to produce more of that corn. The incentives of the farmers is they’ll get more money to maximize their utility by producing more corn. The incentives of the government is to have more corn therefore a bigger profit. “Acting as consumers, producers … people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them”[3].

 

[1] Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: Norton, 2002

[2] Masaki Flynn, Sean. “Perverse Incentives.” Forbes. Forbes Magazine, 20 Feb. 2009. Web. 13 June 2016. <http://www.forbes.com/2009/02/19/incentives-compensation-bonuses-leadership_perverted_incentives.html&gt;.

[3] “Lesson 6: Incentives, Innovations, and Roles of Institutions.” Lesson 6: Incentives, Innovations, and Roles of Institutions. Foundation for Teaching Economics, n.d. Web. 14 June 2016. <http://www.fte.org/teacher-resources/lesson-plans/efllessons/lesson-6-incentives-innovations-and-roles-of-institutions/&gt;

 

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