Copyright

Economic Incentives: Definition & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Economic Integration: Theory, Levels & Types

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 What Are Economic Incentives?
  • 0:38 Extrinsic Incentives &…
  • 2:01 Institutional Uses of…
  • 3:48 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor
Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

What motivates people to work or start a business? In this lesson, you'll learn about economic incentives and related concepts, and be provided some examples along the way. You'll also have a chance to reinforce your knowledge with a short quiz.

What Are Economic Incentives?

Economic incentives are what motivates you to behave in a certain way, while preferences are your needs, wants and desires. Economic incentives provide you the motivation to pursue your preferences.

Let's look at a basic example. Let's say you want wealth. You are motivated to work because you will be paid, which will help you achieve your preference for accumulating wealth. Of course, economic disincentives discourage behavior. Taxes are a prime example of disincentives because they make products and services more expensive.

Extrinsic Incentives and Intrinsic Incentives

Extrinsic incentives come from outside of a person. These are the typical economic incentives that you probably think about all of the time. Extrinsic incentives include cash rewards, bonuses, income and profits. However, it's not all about money. External incentives can include such things as peer recognition, fame, social status and power. Some of these incentives will work better than others, depending upon your preferences. Someone may care more about social status, for example, than money.

Intrinsic incentives are psychological incentives and are internal to the person. Getting satisfaction from work is an intrinsic incentive. The feeling of making a difference in the world is also an intrinsic motivation - regardless of whether you actually make a difference or not. Sometimes extrinsic motivations will trump intrinsic motivations. For example, the idea of building a home for the poor makes you feel good, but you will gladly accept pay to do it, which ends your spirit of volunteering.

Keep in mind that extrinsic and intrinsic incentives are not mutually exclusive. They can work together. For example, you may not care much about money, but you do tend to enjoy power. You also want to change the world. These two incentives motivate you to pursue a political career - for the power and to do good.

Institutional Uses of Economic Incentives

Businesses and governments structure economic incentives to encourage certain behavior. Let's look at government first. For example, the government has decided to tax investment income lower than earned income because it wants to encourage investment and saving. The government also wants to encourage 'family farms' and have provided subsidies to family farms as an incentive to keep families farming. A city may want to encourage businesses to revitalize its downtown district and offers attractive tax benefits if they locate downtown. Finally, central banks will act to affect interest rates to encourage or discourage borrowing.

To unlock this lesson you must be a Study.com Member.
Create your account

Additional Activities

Examples of Economic Incentives and Disincentives

For each of the following, answer the following:

  • Is an economic incentive or disincentive created? If so, which?
  • If an incentive (or disincentive) is created, is it extrinsic, intrinsic, or both?
  • What action (or actions) is(are) being encouraged or discouraged?
  1. A new seatbelt law is passed that punishes people who don't wear their seatbelts while driving. If a person is caught doing this, they must pay a $100 fine.
  2. A new law is passed that gives first-time homebuyers a $5,000 tax credit on the purchase of a home.
  3. Your boss tells you that if you continue to do good work, you will get promoted to a manager, which comes along with a pay raise.
  4. In the United States, an individual who engages in securities fraud is subject to a fine of more than $10,000 in addition to spending time in jail.
  5. Casinos typically give better benefits (such as free nights at their hotels and money to be used in slot play) to visitors to spend more money at their casinos.
  6. A store implements a new policy where shoplifters will have their picture put on the wall for all customers and staff to see.

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support