QuestionAugust 21, 2025

Explain with examples what incentives disincentives and externalities are.

Explain with examples what incentives disincentives and externalities are.
Explain with examples what incentives disincentives and externalities are.

Solution
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Answer

Incentives motivate actions with rewards; disincentives discourage actions with penalties; externalities affect third parties positively or negatively. Explanation 1. Define Incentives Incentives are rewards or benefits that motivate individuals or entities to perform certain actions. They can be financial (e.g., bonuses, discounts) or non-financial (e.g., recognition, promotions). 2. Example of Incentives A company offers a bonus to employees who exceed their sales targets. This financial incentive encourages employees to work harder to achieve higher sales. 3. Define Disincentives Disincentives are penalties or negative consequences that discourage certain behaviors. They aim to reduce undesirable actions by imposing costs or drawbacks. 4. Example of Disincentives A government imposes a heavy tax on cigarettes to discourage smoking. The increased cost acts as a disincentive for people to purchase cigarettes. 5. Define Externalities Externalities are effects of a transaction that impact third parties not directly involved in the transaction. They can be positive (beneficial) or negative (harmful). 6. Example of Positive Externality A homeowner plants a garden, which beautifies the neighborhood and increases property values for neighbors. This is a positive externality. 7. Example of Negative Externality A factory emits pollution into the air, affecting the health of nearby residents. This is a negative externality.

Explanation

1. Define Incentives<br /> Incentives are rewards or benefits that motivate individuals or entities to perform certain actions. They can be financial (e.g., bonuses, discounts) or non-financial (e.g., recognition, promotions).<br /><br />2. Example of Incentives<br /> A company offers a bonus to employees who exceed their sales targets. This financial incentive encourages employees to work harder to achieve higher sales.<br /><br />3. Define Disincentives<br /> Disincentives are penalties or negative consequences that discourage certain behaviors. They aim to reduce undesirable actions by imposing costs or drawbacks.<br /><br />4. Example of Disincentives<br /> A government imposes a heavy tax on cigarettes to discourage smoking. The increased cost acts as a disincentive for people to purchase cigarettes.<br /><br />5. Define Externalities<br /> Externalities are effects of a transaction that impact third parties not directly involved in the transaction. They can be positive (beneficial) or negative (harmful).<br /><br />6. Example of Positive Externality<br /> A homeowner plants a garden, which beautifies the neighborhood and increases property values for neighbors. This is a positive externality.<br /><br />7. Example of Negative Externality<br /> A factory emits pollution into the air, affecting the health of nearby residents. This is a negative externality.
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