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5 6 and 7 more key ideas key incentives incentives if

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Unformatted text preview: aximizing as Marginal benefit ≥ Marginal Cost Marginal » More on this in Ch. 5, 6 and 7 More Key Ideas Key Incentives Incentives » If people make decisions using cost-benefit If analysis they will respond to incentives incentives » Incentives are all things that (1) affect Incentives benefits and/or cost and (2) can be changed by someone » Policymakers do not need to tell people what Policymakers to do or not to do – just set the proper just incentives Key Ideas Key Incentives Incentives » To discourage socially harmful behaviour – To harmful behaviour increase cost, reduce benefits (punish crime, increase tax pollution) » To encourage socially beneficial behaviour – To beneficial behaviour decrease cost, increase benefits (reward new decrease inventions, subsidize education) » It is important to get incentives right! It Key Ideas Key Incentives Incentives » Global Financial Crisis: many global financial Global institutions made very risky investments and became insolvent » Some of them went bankrupt Some » Others were bailed out with public money because Others they were considered “Too Big To Fail” » If you expect to be bailed out no matter what If happens, you have an incentive to take excessive risk incentive to Economic Model Economic In order to understand how markets allocate scarce resources economists develop and study “economic models” Economic Model Economic An explanatio...
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