Incentives

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.