Entrance Ticket Why are incentives important in the study of economics? Give an example to support your answer.

Agenda Go over HW Quiz Announcement Notes More Economic Puzzles Exit Ticket

HW: Types of Incentives POSITIVE NEGATIVE

Quiz Announcement There will be a short quiz on Friday Will be in the form of short answer questions (no multiple choice / true & false) Will just be on the introductory ideas up through today

Remember: An incentive is something that causes a person to act or change behavior, such as the prospect of a punishment or a reward Ex) A high tax on gasoline in Europe created an incentive for Europeans to drive smaller, fuel-efficient cars.

Different Types of Incentives Economic – ex) The addition of a $3 per pack tax on cigarettes to discourage smoking practices Social – ex) The banning of cigarettes and bars as a social incentive to not smoke Moral – ex) When the U.S. government states that terrorist groups raise funds by selling black market cigarettes, that provides a moral incentive to smoke less Source: Freakonomics

Puzzle: Why does paying people to donate blood lead to fewer donors? In the 1970s, researchers wanted to study the motivation behind donating blood After installing an economic incentive (in the form of a small amount of money), they were shocked to find less donors appearing at the blood drive? Why?

Main Point: Sometimes policies affect incentives in an unexpected way, leading to unintended consequences In the blood donation example, the substitution of a financial incentive transformed blood donations into a tedious way to make a small buck rather than a selfless act that save lives

Two Groups, Two Puzzles Each half of the room will attempt to explain one puzzle regarding incentives Left side of room: Why did the amount of parents picking their children up late at a daycare increase after the daycare instituted a fine for late parents? Right side of room: Why did seatbelt laws lead to more accidents?

Why do seatbelt laws cause more accidents? Seatbelts were not required by law until the 1960s When the laws were passed, people unanimously believed all the outcomes would be positive But one economist found that seatbelt laws led to MORE car accidents

The Connection to Incentives It costs drivers more time (due to driving slower) and more energy (due to greater focusing) to drive safely than to wear a seatbelt So…seatbelt laws provided an incentive to drive more recklessly The result: fewer deaths per accident, but more accidents

Daycare Study Lateness Fee = $3 per offense Daycare Costs = $380 per month More parents were late once fee was imposed

Daycare Fines & Incentives The fine was too small, meaning that the economic incentive to arrive on time was not attractive enough The fine substituted an economic incentive for a potentially more effective moral incentive (guilt) Source: Freakonomics

Main Point: Incentives have to be attractive and worthwhile for them to actually affect behavior or decision making Sometimes, this means increasing the value of an economic incentive, but other times it means changing the type of incentive

Exit Ticket Give a new example for each of the following three types of incentives (economic, social, moral) They may or may not be related to the same scenario