1. The Role of Incentives

2. Incentive--a thing that motivates or encourages one to do something.

3. People respond to incentives
Positive Incentives reward people
for behaving in a certain way:
Come shop on this day and save 20%
Get excellent grades and you can get into a
good university
Fly with our airlines and we’ll give you frequent
flier miles
You can watch t.v. if you clean your room

4. Negative Incentives (disincentives) punish people for behaving in a certain way:
No recess if your homework isn’t done
Social ordinance laws: hold adults responsible for underage alcohol use in their households whether the adults are present or not
Texting while driving, first offense:
Overall average fine for first offense: $100
Georgia: $297 and one point on your driving record
Alaska: up to $10,000

5. Incentives: U.S. vs. European Energy Policy
What incentives or disincentives can you think of that influence your behavior?
Working hard to get into a good college
Getting home on time to avoid being grounded
Avoid getting a ticket
$10,000 tax cut for buying hybrid
Cash for Clunkers
$8000 house credit
Price of gas goes up
What is the fine for parking illegally at Redwood? Is it a high enough incentive to change your behavior? What if it were $200?

6. Taxes as Incentives
Taxes alter the behavior of consumers by providing an incentive or disincentive
Taxes per Gallon:
USA = $ 0.50 tax per gallon
Europe = $3.00 tax per gallon

7. USA vs. Europe Cost of Gasoline USA: $2.70 per gallon
Europe: $6.00 per gallon

8. How does taxing gasoline in Europe change behavior of both consumers and producers?
Drive less
Buy smaller cars
Bike/walk more
Demand mass transportation
Make smaller, more efficient cars
Provide mass transit

9. Scooters almost as common as cars

12. What incentives/disincentives could the U. S
What incentives/disincentives could the U.S. use to reduce/end its use of fossil fuels? 1. 2. 3. 4. 5.

13. What is a “perverse incentive?”
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers.

14. Many problems in society occur because of “perverse” incentives
Testing for alcohol at dances
Company executives getting bonuses for reporting higher earnings
In Vietnam under French colonial rule, a program paying
people a cash reward for each rat tail
19th century paleontologists traveling to China used to pay peasants for each fragment of dinosaur bone brought to them
In Hanoi, under French colonial rule, a program paying
people a bounty for each rat tail handed in was intended
to exterminate rats. Instead, it led to the farming of rats
19th century palaeontologists traveling to China used to pay
peasants for each fragment of dinosaur bone (dinosaur fossils)
that they produced. They later discovered that the peasants dug up
the bones and then smashed them into many pieces, greatly reducing
their scientific value, to maximise their payments
Providing company executives with bonuses for reporting higher earnings encouraged executives at Fannie Mae and other large corporations to inflate earnings statements artificially and make decisions targeting short-term gains at the expense of long-term profitability

15. It’s all about the correct incentives
My Challenge to You: Be of great service to mankind by finding an out-of-whack incentive and fixing it

16. How could the U.S. reduce/end its use of fossil fuels?
Increase Miles Per Gallon requirements
Invest in research of Hydrogen Fuel Cells
Provide tax credits for buying Hybrid/Electric Cars
Raise taxes on gasoline
Put money into public transportation
AB 32-type laws to promote alternative
energy sources