Describe 3 examples how incentives can result in unintended consequences.
In Wheelan's Naked Economics, he goes over the possible unintended consequences when incentives are not thoroughly explored. One example is when the Mexican legislature implemented a policy that would reduce emissions released from cars. The policy called for one day of the week in which cars with certain license-plate numbers were prohibited from driving. Mexicans reacted to this policy by buying old used cars that would allow them to drive on the day of the week they were prohibited from driving. These cars released more emissions than before and more total cars were on the road. Another example is when CEOs are given stock options in the company. While these stock options are designed to ensure the long term success of the company, they often cause the inverse. Greedy CEOs often increase the profitability of their firm in the short run and leaving the company vulnerable to failure in the long run. This immediate success would allow for the CEO to sell his stock options for a high price. The third example is the Black Rhino, an endangered species in Africa. Environmentalists want to keep them in nature reserves, at the protection of their surrounding communities. However, if the Rhino ceases to exist then it will bring no financial benefit to the town, thus giving them no incentive to protect this natural wonder.
Tuesday, September 11, 2012
Thursday, September 6, 2012
Power of Markets
Prompt: Using Wheelan as a guide, discuss how economic decisions about what to produce, how to produce, and how much to produce are made.
Wheelan, as most economists turn to the invisible hand as the driving force of a free market economy. This invisible hand is the power of people striving for their utility. Firms will produce items whose marginal cost is overpowered by its marginal gain. These products must be in demand of the public or the marginal cost will out weigh the marginal gain thus making this product non-profitable. Since resources are scarce, people must bid or pay to obtain resources they desire. This essentially creates supply and demand which dictate the price of these items. During periods when demand outweighs supply goods increase in value. When supply outweighs the demand the price will drop significantly. This is the invisible hand's way of telling a company their product is no longer profitable. Once a firm realizes that the certain product is no longer profitable, they can chose to improve, innovate or stop production and move on. Firms attempt to find the most efficient way to produce these goods in order to increase their profit.
Wheelan, as most economists turn to the invisible hand as the driving force of a free market economy. This invisible hand is the power of people striving for their utility. Firms will produce items whose marginal cost is overpowered by its marginal gain. These products must be in demand of the public or the marginal cost will out weigh the marginal gain thus making this product non-profitable. Since resources are scarce, people must bid or pay to obtain resources they desire. This essentially creates supply and demand which dictate the price of these items. During periods when demand outweighs supply goods increase in value. When supply outweighs the demand the price will drop significantly. This is the invisible hand's way of telling a company their product is no longer profitable. Once a firm realizes that the certain product is no longer profitable, they can chose to improve, innovate or stop production and move on. Firms attempt to find the most efficient way to produce these goods in order to increase their profit.
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