ECON1002 Study Guide - Midterm Guide: Pareto Efficiency, Cost, Comparative Advantage
10 Mar 2019
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An incentive is something that induces a person to behave in a certain way. Incentives include cost (price) and benefits (consumption pleasure) It assumes that people are rational and will compare cost and benefits. Eg: incentives to kill sparrows in medieval china led to an explosion in the locust population, which then ate even more grain than the sparrows did. Eg: employers are banned from using credit reports in. America to screen applicants but bc poor credit rating are found among black and minority groups they don"t hire them, not bc they are racists but bc they want to avoid employees with bad credit ratings. Why should policymakers think about incentives? when policymakers fail to consider how their policies affect incentives, they often end up facing unintended consequences. A pareto-efficient outcome is one where nobody can be made better off without making someone else worse off.
