Economic Incentives - Explained
What are Economic Incentives?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What are Economic Incentives?
Incentives are factors that motivate individuals in their actions or inaction. In economics, incentives are generally related to value and utility.
What are Extrinsic and Intrinsic Incentives?
Intrinsic incentives are internal in nature - not arising from external influences. We often regard intrinsic motivations as innate or in-born. The utility involved with intrinsic motivations comes from the action or inaction itself.
Extrinsic incentives regard external pressure or reward that accompanies an action or inaction. By their nature, they provide motivation for an action or inaction that is separate from the action or inaction itself.
What are the Types of Economic Incentive?
Economic incentives are generally used by government or private industry to stimulate activity by citizens or employees.
The most common forms of economic incentive include:
Financial - A financial incentive is a form of compensation. This might include a salary, bonus, or commission.
Taxation - Providing a deductions, credits, or other rebates against tax obligations works similarly to compensation in motivating action or inaction.
Subsidies - This is compensation in the form of partial assistance to cover the cost of activities or to purchase basic necessities.
Negative Incentives - This is similar to negative reinforcement in that it removes a negative consequence that will occur in the event of an on-going course of action or with the failure to take action.
Related Topics
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Utilitarianism
- Indifference Curve
- Time Preference Theory of Interest
- Incentives
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost