Why do we recycle, work late, or buy energy-efficient appliances? Economists argue that society is entirely driven by incentives. An incentive is simply a benefit or a cost that motivates your behavior. If you change the incentives, you inevitably change how an entire society acts, often with massive ripple effects. 2/ Incentives generally fall into three categories: economic, social, and moral. An economic incentive appeals to your wallet—like a tax penalty for littering or a bonus for hitting sales targets. A social incentive appeals to your reputation, like the desire to be seen as a good citizen. A moral incentive appeals to your conscience, pushing you to do what is "right." 3/ When governments or businesses try to solve societal problems, they manipulate these levers. For example, to combat climate change, a government might offer tax rebates for buying electric vehicles (economic) while running public awareness campaigns to make eco-friendly living trendy (social). 4/ However, designing incentives is tricky business because they often trigger unintended consequences. A classic historical example is the "Cobra Effect": when the colonial government in India offered a cash reward for dead cobras to reduce the population, people simply started breeding cobras to sell them for the reward. When the bounty was canceled, breeders released the worthless snakes, leaving the city with more cobras than before. 5/ Ultimately, policy fails when it ignores human nature. To understand why a society behaves the way it does, stop looking at what people say they value, and start looking at what they are actually being rewarded to do.
