Thursday, May 4, 2017

People Respond to Incentives

"Most of economics can be summarized in four words: people respond to incentives. The rest is commentary."

– Steven Landsburg, The Armchair Economist

Parents and pet owners, already know the first lesson of economics – that people respond to incentives. Behaviors that are rewarded are done more often. Behaviors that are punished are done less often. My dog Josh likes to sneak food from the kitchen counter, but he (usually) doesn’t do it because he knows I’ll scold him. And if I tell Josh to sit, he’ll sit because he knows he’ll be rewarded with kind words and a scratch behind the ears. Incentives are the first clue to understanding human nature. Whenever you want to predict the effect of a new law or government regulation, the first thing you should ask yourself is which behaviors are punished, and which ones are rewarded. It’s a pretty safe bet that people will do less of whatever is punished, and more of whatever is rewarded. 

Sometimes people understand the first lesson of economics. The goal of “sin taxes” on cigarettes and alcohol is not to raise money for the government, but to change behavior. Smokers are punished with higher prices so they will smoke less. Conversely, we subsidize (reward) donations to charity by giving people tax breaks. Donating to charity is a good behavior that we want people to do more often. That’s why economists say, “you get less of what you tax and more of what you subsidize.” 

Free and Equal Kingdom: Overview

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