How can incentives effect the economy positively and negatively?

Molly Hibbs               pic for econ

A personal incentive is something that motivates an individual to perform an action. These incentives can affect people, and the economy in good and bad ways.  People don’t realize that the choices they make can influence the entire population in a bad way, because all that they care about is maximizing their own utility. When a single person is only looking out for their economic status and not thinking about their fellow citizens, things tend to be worse off for everyone. In Naked Economics, by Charles Wheelan, we see the example of a fisherman whose decision to maximize his utility negatively impacts those around him. When a limited number of fish are available in certain area, it would be best for everyone to limit the number of fish caught. This would allow the fish populations to recover. However, a fisherman may assume that his fellow fisherman only care about their own wealth and financial status, so they will naturally try to take as many fish as possible in order to support themselves and their family. The next fisherman is going to think the same exact thing, so he also makes the decision to try to catch all of the fish, leaving barely any left for the others. This in turn makes everyone worse off. They would be better off if each fisherman limited themselves to only a certain number of fish per day, so that everyone can benefit [1].

Another type of incentive that can be viewed as negative is called a perverse incentive, which is an incentive that has an unintended and undesirable result. For example, one may decide to buy clothes from a company that donates 20% of its profits to a charity for young children in china, only to find out that the Chinese clothing factories hire young girls and boys to work long hours to make those clothes. The intentions of the charity and the purchaser are good, but the end result is more factories with more child labor.

Don’t think that incentives are all bad. Some actually do help the economy. For example, at some fast food restaurant, managers put a sign up that says if your cashier does not hand you your receipt that your meal is free. This is because some employees may try to maximize their utility at the job by destroying the record of a food purchase and keeping the money for themselves. The manager offers customers this incentive to encourage them to help monitor the employees for the company, thus keeping his or her employees in line, which helps the business in the long run.

Another positive example of an incentive in the marketplace is the marketing taking place on YouTube blogger channels. Some famous YouTuber bloggers have millions of followers. As a result, they have tremendous influence over their viewers purchasing decisions. These bloggers are often given sample products to promote on their blogs. This results in some limited sales for the companies. To encourage purchases, retailers also give bloggers discount codes to give to their subscribers for certain companies and products [2]. Sometimes the discount percentage goes directly towards the YouTuber’s bank account as a reward for promoting their products. These sales can also be limited due to people not wanting to reward bloggers financially by their purchases. However, if the YouTuber announces that all proceeds will go to a charity, more people would be willing to use the code because they are getting their products, and helping someone in need. The blogger becomes more popular for their good works and the consumer is able to maximize their utility by getting a product they desire, for a price they are willing to pay, with the added benefit of feeling their purchase is doing some good in the world. It’s a win-win incentive for the retailer, blogger, and consumer.

  1. Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W. W. Norton and Company, 2010). 45.
  2. “Content Marketing Tactics: Business Blogging Pros, Cons, Best Practices & Bands Doing it Right,” http://www.toprankblog.com, 2017, Accessed June 19, 2017.  http://www.toprankblog.com/2013/05/business-blogging.html
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