Tuesday, August 29, 2006


Russell Roberts pointed me to an article that he authored on incentives in which he uses gasoline as an example to explain the incentive system:

Thinking about how people respond to the incentive of the higher price opens up a world of possibility beyond the cold turkey of going without. When gasoline gets more expensive, some people car pool, some people drive at slower speeds, some try and combine multiple errands into one trip. Let the price of gasoline rise enough and be expected to stay higher for a long enough period of time and some people will buy a car that gets better mileage, move closer to work or postpone or cancel that order for the pleasure boat that takes $400 to fill its tank when gasoline is $3 a gallon.

There are some interesting conclusions and other interesting examples in the article that make it a worthwhile read; it is especially refreshing to see an economist delve into the world of non-monetary incentives after having taken so many classes where the economics professors use the phrase “everything else being equal” when explaining supply and demand.


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