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Chapter 1: Ten Principles of Economics- Principle 4: People Respond to Incentives


The fourth principle of economics is people respond to incentives. This principle of economics is seen in everyday life and in current events that we read in the news. An incentive, by definition, is something that causes a person to act. When people see something with an incentive, psychological studies show they are more likely to complete the task, because of the incentive waiting for them. People respond to incentives is an idea used when raising a child, or when dealing with global warming.

In regards to parenting, one tactic studied and often used by parents is extrinsic motivation. A parent may tell their child, "Do your dishes and you will get $10", and sure enough, the child will get straight to washing their dishes. An external factor, money in this instance, was used, and the child responds by acting upon the task asked by their parent. You can imagine the plethora of other incentives you were given now that you understand how people respond to incentives.

Beyond the hypothetical scenario of washing dishes, the New York Times published an article on global warming, which highlighted EPA’s Clean Power Plan to save our environment. In short, the idea discussed of reducing the use of fossil fuels to decrease the chances of natural disasters can only get us so far. The other part of the plan is to make a drastic change to global warming, by getting the people themselves to change. The idea of incentives in this plan is discussed to encourage conservation and the use of low-carbon energy. Similar to the dishes example, one incentive would be money, since returning the carbon-tax revenues back would result in people receiving a dividend. Thus, this article comes to show how you cannot escape the theories of economics, since they can apply to an enormous amount of everyday problems and scenarios.

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