How do rules and changing incentives influence people’s economic behavior?

1. How do rules and changing incentives influence people’s economic behavior?

2. GUIDE TO ECONOMIC REASONING 1. People make decisions. People choose the alternative that seems best to them because it involves the least cost and the greatest benefit. 2. People’s choices involve costs — monetary costs and opportunity costs. Opportunity cost is the second best alternative people give up in making a choice. There may also be external costs, and external benefits. 3. People’s choices have consequences that lie in the future. The important costs and benefits in economic decisions are those that will appear in the future. Economics stresses the importance of making choices about the future. People cannot choose to change the past. 4. People respond to incentives in predictable ways. Incentives are benefits or rewards that encourage people to act. When incentives change, people’s choices change.

3. Incentives Positive incentive = reward Negative incentive = punishment Perverse incentive = incentive that has an unintended or opposite consequence

4. Which incentive is which? 1. Your parents offer to give you $100 for every A you earn this semester 2. Your parents threaten to take away your phone if you don’t get an A in every class 3. Seeing #2 as unreasonable, you decide to intentionally get an 89 in every class in protest

5. Incentives quiz! • Do your very best on the quiz. • Make no marks on the quiz. • Mark all answers on Activity 2, First Answer Sheet • Finish in 5 minutes

6. Grade the Quiz! • Exchange answer sheet with a neighbor for correcting • Listen to the correct answers • Record scores (number correct) for the quizzes you correct in the space provided on the answer sheet

7. Assign a Grade Based on the Following Rule:

8. Class Tally of Quiz Grades

9. Discussion: • How many of you usually try to earn as high a grade as possible? Why? • Why did so many of you end up with low grades on the quiz? • What is an incentive? (If you don’t remember, look at question #3 on your quiz) • What incentive influenced the choices you made in selecting answers to the quiz questions? • If you had known before you took the quiz that the grading scale was inverted, how many quiz questions would you have tried to answer correctly? Why?

10. Incentives quiz (Second Round)! • The grades from the first quiz will NOT count. • Instead, you will be permitted to take the same quiz a second time in order to have a chance to improve your grade. • Use the same quiz you took for Activity 1 • Make no marks on the quiz. • Mark all answers on Activity 3, Second Answer Sheet • Finish in 5 minutes

11. The New Grading Scale

12. Discussion: • How well did you do this time? • Why didn’t everyone earn a grade of A, since all of you knew what the correct answers were before you even took the quiz? • How many students tried to miss at least one question on the quiz? Why? • What incentive influenced the choices you made about selecting answers to the quiz questions this time? • What caused the incentive change?

13. Rules IncentivesChoices What is the relationship among choices, incentives and rules?

14. 1. Which of the following rules would encourage high school seniors to study during their last semester in high school? A. All seniors will graduate except for five students voted “most uncooperative” by the teachers. B. Seniors who have passed all their courses before the last semester in high school must average at least a D in all their courses to graduate. C. All seniors who are voted “friendly” by their classmates will graduate, no matter what grades they achieve in the last semester. D. Seniors who do not equal their highest semester GPA during their last semester in high school will not graduate.

15. 2. Which of the following rules will encourage workers to work harder and produce more at their jobs? A. After working at a firm for six months, workers are guaranteed a job in that firm for the rest of their lives. B. Workers receive 50 percent of all the money made on sales of items produced by the firm. C. Workers receive the same pay no matter how much they work and produce. D. Workers receive raises based on how many times they volunteer to do community work.

16. 3. In Africa, poachers kill many elephants. Local people who live near elephants often do not protect the elephants from poachers. Which of the following rules will most likely help reduce the poaching of elephants? A. Elephants cannot be owned or claimed by anyone. They are to be left unharmed, even if they move through villages, harm people, and trample crops. B. People should love elephants and respect nature’s great beasts. C. People living near elephant herds can use the elephants to make money, charging fees for tourists who want to see the animals in the wild. D. Anyone who provides the evidence needed to arrest and convict a poacher will be paid a reward of $1.

17. Rules (Laws) IncentivesChoices Using the concept of incentives, come up with a law would most likely produce more jobs in the United States.