What is an incentive?
An incentive is a reason to do something or not do it. It makes one choice look better or worse than before.
Economists say people respond to incentives. This means: when the gain from a choice goes up, more people choose it. When the cost goes up, fewer people choose it.
Kinds of incentives
- Positive incentive (reward): a gain for doing something, such as a bonus, a discount or a prize.
- Negative incentive (penalty): a cost for doing something, such as a fine or a tax.
- Money incentive: cash, prices, wages, taxes.
- Non-money incentive: praise, respect, time off, a good feeling, a rule or a law.
A penalty on one choice works like a reward on the other choice. In the 3D, the fine on trash pushes kids to the recycle bin, just like the reward pulls them.
How people decide
Each person compares the benefit with the effort or cost. A person acts when benefit is at least as big as cost.
Different people have different costs. A student who lives next to the bin has low effort. A student far from it has high effort. That is why a small reward moves a few people and a large reward moves many. This is the idea behind rising supply when prices rise.
When incentives go wrong
A badly designed incentive can bring side effects (unintended results).
- A reward that is too big can cost more than the good it buys (see the ₹300 in the 3D).
- If a teacher pays only for the number of pages, students may write long, empty pages.
- If a town pays for every dead pest, some people may start breeding pests to earn the reward.
Good designers ask: what exactly will people do to get this reward?
Try it
In the 3D, set the fine to 0 and move the reward slider from 0 to 10. Write down how many kids recycle at 2, 5 and 8. Predict first: at which reward do half the kids recycle?
At home: offer your family ₹1 in a jar for every bottle returned for a week. Count the bottles before and after.
Key formulas and definitions
- Act if: benefit ≥ cost (effort)
- Total push = reward + fine
- Cost to the payer = reward × number of people who act
- More incentive → more people act (but costs more)
Worked examples
1. A shop gives ₹2 off for bringing your own bag. Is this a positive or negative incentive?
Positive. It is a reward for a choice.
2. A city adds a ₹10 fine for littering. Is this positive or negative?
Negative. It adds a cost to littering.
3. A kid finds recycling worth ₹4 of effort. The reward is ₹3 and there is no fine. Will they recycle? What if the fine on trash is ₹1?
Reward 3 < effort 4, so no. With a fine of 1, the total push is 4, which equals the effort, so they recycle.
4. A town pays ₹5 per bottle, and 14 kids recycle one bottle each. What does the town pay?
5 × 14 = ₹70.
5. Raising the reward from ₹5 to ₹8 moves 14 kids to 23 kids. How many extra kids, and what is the extra cost per extra kid on average?
Extra kids: 23 − 14 = 9. New cost = 8 × 23 = 184. Old cost = 5 × 14 = 70. Extra cost = 114. Per extra kid = 114 ÷ 9 ≈ ₹12.7.
6. A company pays workers per item made. What side effect might happen?
Workers may rush and make poor-quality items. The incentive rewards number, not quality.
Common mistakes
- Thinking incentives always mean money. Praise, rules and respect are incentives too.
- Thinking everyone reacts the same. People have different efforts and costs.
- Forgetting that a penalty also works as an incentive.
- Ignoring side effects. A reward can lead people to cheat or cut corners.