Incentives, Incentives, Everywhere!

Emily Khoury Honorbound – Period 5

Incentives in a market can go wrong when they lead to an outcome or motivation that is different than expected. In Chapter 3 Naked Economics, Charles Wheelan asserts, “self-interest makes the world go around.”[1] Clearly, the challenge is in predicting how people will act in this self-interest. Although life is not always simply good and bad, we can see the general idea of what makes good and bad policies through their incentives.

Wheelan writes, “Good policy uses incentives to channel behavior toward some desired outcome.”[2] For instance, London implemented a policy to reduce traffic, where a toll was charged for a certain area of the city during rush times. Shortly after, they raised the toll, ending up with a decrease in traffic by 20 percent.[3] Here, the incentive to reduce traffic by implementing a tax worked successfully. In a similar way, Ursuline gives infractions to girls who are repeatedly tardy without legitimate excuses. By using a negative consequence, punctuality is incentivized to students.

On the other hand, he says, “Bad policy either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized.”[4] He uses an example of policy in Mexico City that limited the days cars could be driven based on license plate number in order to reduce pollution. However, people began getting a second car or keeping their old ones so that they could drive every day.[5] Mexico City’s policy came with a perverse incentive, or an incentive that leads to unintended consequences. By limiting the driving ability of people and not having good transportation alternatives, many people were able to find a way to still drive every day while following the policy. But, it did not fulfill its goal of reducing the pollution. In my life, perverse incentives showed up in cheer. After the first football game, our coaches imposed a workout circuit, called a pride, for each mistake we made at the game, reading off a list of mistakes written at the game. After our prides, we continued with our usual practice, but the attitude of the team was down. We were physically exhausted and angry at such extreme consequences for small things like messing up on a chant. However, instead of motivating us to want to do better, the incentive created by doing prides led us to all lose motivation. With an incentive to aim for perfection, something that is unattainable, we did not see any point in putting in the extra effort but instead saw no reason to put in normal effort.

In good incentives, the key seems to be providing them for a reasonable problem, either one that people want to fix or that is a typical expectation. The incentives should also be enough to make the change but not excessive to an unrealistic standard. In the bad incentives, we see that the problems aiming to improve were not immediate concerns of the people and that the consequences were not effective for the people. The traffic law in Mexico City left residents unable to continue daily routines, and the prides left us cheerleaders with harsh consequences and unattainable goals, ruining the morale and motivation.

[1] Charles Wheelan. Naked Economics: Undressing the Dismal Science [New York: Norton, 2010], 34.

[2] Ibid., 39.

[3] Ibid., 38.

[4] Ibid., 39.

[5] Ibid., 37.

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