Incentives Economic Behavior
Incentives &
Economic Behaviour.
Choices respond to rewards, costs, rules and information. Learn to predict behavioural responses—and to recognise when a well-meant policy creates an unintended result.
Observe
Look for the changed payoff.
Behaviour changes when
the rules of choice change.
A deposit encourages bottles to be returned. A congestion charge makes driving into a city centre more costly. A deadline creates urgency. Public recognition can motivate effort without changing anyone’s income. Each changes the expected benefit or cost attached to an action.
OBSERVE YOUR ENVIRONMENT
Which reward, penalty, rule or social signal changed something you did this week?
Think
Separate the mechanism from the intention.
Incentives reshape
relative benefits and costs.
An incentive is any feature of the decision environment that makes one action more or less attractive relative to another. “Positive” means a reward is added; “negative” means a cost or penalty is added. These labels describe the mechanism—not whether the outcome is morally good or bad.
Subsidy
A grant lowers the private cost of installing home insulation.
Charge
A fee raises the private cost of using a disposable cup.
Recognition
Public acknowledgement raises the social benefit of contributing.
Restriction
A rule limits access when agreed standards are not met.
Choose an action when: Expected Marginal Benefit ≥ Expected Marginal CostAn incentive can alter either side of this comparison—and therefore change the decision.
Analyse
Change the incentive. Observe the response.
Design the price of
an urban journey.
Adjust the parking fee and bus fare. The model combines money with a fixed estimate of time and convenience costs, then predicts how travellers redistribute between car and bus.
City travel simulator
INTERACTIVE INCENTIVESCar cost€12Bus cost€7PREDICTED CAR SHARE30%PREDICTED BUS SHARE70%
The lower generalised cost makes bus travel relatively more attractive.
Apply
Test intended and unintended effects.
A policy can succeed
and still surprise us.
People respond to the incentive they actually face, which may differ from the designer’s intention. Strong policy design anticipates substitution, avoidance, unequal constraints and possible gaming of measured targets.
Container deposit
A refundable deposit raises the reward for returning a used container.
Likely response: higher return and recycling rates.
Performance target
Rewarding only the number of cases processed may encourage easy cases to be prioritised.
Possible result: the metric improves while difficult cases wait.
Policy-design rule
Ask not only “What behaviour do we want?” but also “What exactly are we rewarding, what alternatives remain, and who is able to respond?”
Decide
Choose the clearest mechanism.
Which incentive most directly
changes relative cost?
A university wants students to replace disposable cups with reusable ones while preserving access to hot drinks.
MODULE 02 · CHECKPOINT
You can now see
the incentive structure.
Rewards, costs, rules and information alter relative payoffs. Their effects depend on preferences, constraints and available alternatives—so good economic reasoning also looks for unintended consequences.
