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Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
Mpp#012+all.about.incentives.(33)
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Mpp#012+all.about.incentives.(33)

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    • 1. for Your Consideration People Will Respond to (.I.=) INCENTIVES in Predictable Ways.Lesson 9: Incentives 03/19/13 1
    • 2. An action or policy encouraging individuals to act in a particular way by increasing the benefits of their actionsLesson 9: Incentives 03/19/13 2
    • 3. An action or policy discouraging individuals from acting in a particular way by increasing the costs of their actionsLesson 9: Incentives 03/19/13 3
    • 4. Monetary (.I.=) Incentives Characteristics – Freedom to choose – Inexpensive to administer – Involves monetary cost – can cause perverse results, e.g. cheatingLesson 9: Incentives 03/19/13 4
    • 5. Perverse (.I.=) Incentives (.I.=) Incentives resulting in unintended negative secondary effects – Rent controls – Agricultural price supports – Constructs used to pay for: » crime reduction » informers » urban housingLesson 9: Incentives 03/19/13 5
    • 6. a Situation for your Consideration Trash Generation & RecyclingLesson 9: Incentives 03/19/13 6
    • 7. The Problem Trash disposal space is scarce. In many areas, trash disposal has no monetary cost or no marginal cost; there is no disincentive to produce trash. so people overuse trash disposal services and space.Lesson 9: Incentives 03/19/13 7
    • 8. The Solution Provide monetary disincentives at the margin for the generation of trash. For example ~ first container costs $4; the second container costs $10; and the third container costs $25. Sell trash disposal bags as the only acceptable receptacle for trash for pickup Allow a market in bags.Lesson 9: Incentives 03/19/13 8
    • 9. Possible Secondary Effects people will burn (additional cost) their trash people will dump trash in unauthorized areas (additional cost) people will create compost (a benefit)Lesson 9: Incentives 03/19/13 9
    • 10. Recycling As much as 90% of our trash can be recycled Costs include the cost of the labor to separate the waste; the cost of additional containers and the cost of separate pick-up. Some of the costs are repaid by the recycling firm, but usually not enough to provide sufficient monetary incentives for people to recycle.Lesson 9: Incentives 03/19/13 10
    • 11. Implementing the Solution provide (.I.=) incentives to recycle trash collectors pick up separated recyclables following the law of comparative advantage the people will recycle at the trash collection center there are additional costs involved with recycling continue recycling as long as the marginal benefits are greater than the marginal opportunity costsLesson 9: Incentives 03/19/13 11
    • 12. The Economist’s Approach Increase the cost of the “bad” aspects – e.g. trash production Decrease the cost of the “good” aspects – e.g. recycling Use the law of comparative advantage Continue the activity as long as the marginal benefit is greater than the marginal opportunity costLesson 9: Incentives 03/19/13 12
    • 13. a Situation for your Consideration Water & (.I.=) IncentivesLesson 9: Incentives 03/19/13 13
    • 14. Farmers, Water & (.I.=) Incentives Farmers account for 85% of water usage in California Water is subsidized ~ so farmers pay less than 10% of the going market rates. Old watering techniques waste 50% or more of the water New watering equipment has a cost (disincentive). No incentive exists for the farmer to invest in this equipment because the cost (disincentive) of water use is so lowLesson 9: Incentives 03/19/13 14
    • 15. How to Conserve Water Increase marginal cost of the water used by farmers (acts as a disincentive) Result – as the cost of water rises, farmers will use less water – Farmers will use more efficient irrigation – Farmers will switch to less thirsty crops Institute marginal usage fees for householdsLesson 9: Incentives 03/19/13 15
    • 16. The Economist’s Approach If water usage in California is a problem – stop charging a below market prices to farmers – stop charging a zero marginal cost to households Recognize that there will be secondary effects – some farmers are likely to leave agriculture – other farmers may adjust their procedures by growing less water intensive cropsLesson 9: Incentives 03/19/13 16
    • 17. A Situation for your Consideration (.I.=) Incentives & Organ DonorsLesson 9: Incentives 03/19/13 17
    • 18. Addressing the Organ Shortage People are dying because others refuse to donate their organs at their deaths! No incentive other than being a good Samaritan exists. What incentives might be introduced to induce people to supply organs?Lesson 9: Incentives 03/19/13 18
    • 19. Possible (.I.=) Incentives for Organ Donors to pay the donors burial expenses to pay $1000 cash (or some other amount) to the family other inducementsLesson 9: Incentives 03/19/13 19
    • 20. Possible Secondary Effects exist for the medical personnel to cut your life short. Depending on the (.I.=) incentives your family members may have incentives to cut your life short. The poor may have greater incentives to donate than others.Lesson 9: Incentives 03/19/13 20
    • 21. Property Rights Conserve & Develop Resources consider your desk consider your walls at home versus your walls at school. consider your dog and your “at home” lawn versus your dog and the “city park” lawn.Lesson 9: Incentives 03/19/13 21
    • 22. (.I.=) Incentives to Work & the Colonial Experience – @ 1620 - Plymouth Plantation held in common – One person from each family was expected to work – Families were given food according to the number of people in their family – It was believed there was gold in the vicinity – Half the colony died after first winter – @ 1623 - private property was established – Then the colony flourished 22Lesson 9: Incentives 03/19/13 22
    • 23. So if You Want to Provide (.I.=) Incentives to Produce ~ Establish (.P.=) Property Rights the “women now wente willingly into ye field and took their little-ones with them to set corne, …whom to have compelled would have been thought tiranie and oppression.”Lesson 9: Incentives 03/19/13 23 23
    • 24. Jamestown Each settler receives the same share of the crops but not all work. English “gentlemen” settlers think of themselves as “above” work. As long as the Governor exempts them from work they have no incentive to work. the Settlers starve Captain John Smith forces the “gentlemen” to work by offering very strong incentives. and the “Starving Times” endLesson 9: Incentives 03/19/13 24
    • 25. Discussion Points Review (a) an (.I.=) incentive is an action or a policy encouraging individuals to act in a particular way by increasing the benefits associated with their actions. a disincentive is an action or policy that discourages individuals to act in a particular way by increasing the costs associated with their actions. the (.I.=) incentives can be both monetary and non- monetary in their nature.Lesson 9: Incentives 03/19/13 25
    • 26. Discussion Points Review (b) Perverse (.I.=) incentives may encourage people to act in socially undesirable ways. Trash production can be reduced by increasing the cost of producing trash. Recycling can be increased by decreasing recycling costs at the margin. Water usage can be reduced by charging the full market price to farmers and by increasing the cost at the margin to households. One expects there will be secondary effects some would consider to be negatives.Lesson 9: Incentives 03/19/13 26
    • 27. Discussion Points Review (c) Providing (.I.=) incentives for organ donations will increase the amount of organs available but will have secondary effects. Policies meant to encourage people to work can be effective but they must ensure the secondary effects are not perverse. In general, social policy should: – provide effective incentives – investigate all secondary effects – continue the policy as long as the marginal benefits are greater than the marginal opportunity cost.Lesson 9: Incentives 03/19/13 27
    • 28. (i) How Do (.I.=) Incentives & Disincentives Affect You? Consider your study habits – Your entire grade is based on the final. How much do you study before each class? – You have a quiz every class. How much do you study before each class? Consider overtime – Your boss pays you your regular wage for overtime. How much overtime do you work? – Your boss pays you double for overtime. How much overtime do you work?Lesson 9: Incentives 03/19/13 28
    • 29. (ii) How Do (.I.=) Incentives & Disincentives Affect You? You are being paid $5 for each “A” you get. How hard do you work? You are being paid $1000 for each “A” you get. How hard do you work? If you fail this test you will have to take it over. Do you cheat? (And if you’re caught cheating?) If you fail this test you will be asked to leave CSUSB. Do you cheat? (And if you’re caught cheating?)Lesson 9: Incentives 03/19/13 29
    • 30. (iii) How Do (.I.=) Incentives & Disincentives Affect You? If you come to class you sometimes get extra credit points. If you come to class you get to take the quizzes. If you stay in class to the end you sometimes get extra credit points. If you don’t come to class, you don’t get any of the above.Lesson 9: Incentives 03/19/13 30
    • 31. If you want people to do more of an activity then change the incentives by increasing the marginal benefit or decreasing the marginal cost of the activity. If you want people to do less of an activity then change the (.I.=) incentives by_____________Lesson 9: Incentives 03/19/13 31
    • 32. Policy Implications People respond to (.I.=) incentives in predictable ways. Marginal incentives do work.Lesson 9: Incentives 03/19/13 32
    • 33. Using (.I.=) Incentives & Disincentives ~ Design a Policy to induce teachers to teach well to induce students to learn in school to induce able-bodied welfare recipients to go to work to induce high school students to care for classroom furniture to induce farmers to leave farming to train people to enter the work forceLesson 9: Incentives 03/19/13 33

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