Economic Incentives & Business Issues
When teachers offer students extra recess time for good test grades, they are offering them an economic incentive to behave or act in a certain manner. The government does the same thing to businesses in hopes of compelling corporations to operate in a certain way. However, economic incentives do not always compel companies to act in the intended manner.
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Identification
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The government is a primary issuer of economic incentives, such as subsidies, import quotas, tariffs and tax breaks. Subsidies and tax breaks typically compel a business to expand its production due to the increased benefits. For instance, a subsidy or tax break to install energy-efficient lighting induces companies to create such lights or adapt these products for their own operations. An import quota creates the incentive for businesses to buy materials or other goods from domestic industries as a result of the higher costs of buying abroad. The International Trade Administration cites in 2010 how steel, a commonly regulated commodity is expected to face steep protectionist measures in order to protect the local American industries.
Significance
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Economic incentives can completely reinvent the business landscape. Some incentives have the power to revive a struggling industry. The 2008 Cash for Clunkers program's report to Congress cites how the program saved tens of thousands of jobs in the automotive industry while also reducing carbon emissions. Incentives can also reduce costs by compelling a large number of corporations to adopt a certain practices: Giving tax breaks for businesses that recycle their waste means that recycling technology will become less expensive over time.
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Benefits
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Some incentives compel companies to act in a more environmentally sustainable manner. Many companies will not want to adopt such practices if they are not beneficial to the company's financial position. However, environmental incentives that have the government subsidize the high up-front costs for companies will be beneficial in the long-term as well: The technology usually pays for itself in the long-run. For example, solar technology is expensive to install, but the panels can eventually pay for themselves.
Considerations
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Economic incentives are not limited to government activity. Companies typically entice employees and customers to behave in certain ways, too: Carpool programs, bringing in reusable dishes and asking hotel guests to reuse towels are all instances of incentives designed to save the company from using its scarce resources.
Warning
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Economic incentives sometimes create unintended, negative consequences. Charles Wheelan, author of the book, "Naked Economics" mentions the government prohibiting the import and sale of elephant tusks: An unexpected consequence is making these tusks more valuable because of its increased rarity and therefore, creates more of an incentive to kill the endangered elephants.
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