The Main Economic Incentives and Perverse Economic Incentives - Coursework Example

Economic Incentives & Perverse Economic Incentives Definition 1 Economic Incentives (EIs) Whatever policy promotes or encourages within a government program using economic benefits can be called economic incentives. EIs were found to achieve lower expenditures on the part of government as compared to Command and Control (CAC) policy. The efficiency of EIs was evident when they got implemented. 1.2 Perverse Economic Incentives However, there are times when rewards intended to encourage or promote a certain plan for the good of the economy can accidentally or coincidentally bring about an event that does harm. Such policies and incentives will then become perverse economic incentives. 2. Effects of Perverse Economic Incentives (EIs) Negative effects on the environment characterize perverse incentives. Consumerism, for example, can cause environmental destruction. There are instances when “emission rights” intended to limit the emission of pollutants by manufacturers somehow increased pollution instead of decreasing it. It happened because many manufactures applied for “emission rights”. First of all, the use of EIs was in connection with the issue of pollution and emission of pollutants. It gradually and continually reduced emission of Chlorofluorocarbon (CFC) and Lead into the atmosphere and even encouraged advancement in technology over time. Economic Incentives (EIs) covered a wider scope of implementation, whereas the Command and Control (CAC) policies not only took time to be approved by Congress but were also more expensive and had a more limited coverage. 3. Actual Examples of Economic Incentives (EIs) and Perverse EIs The World Health Organization (WHO, 2012) identified economic instruments, like policies on pollution, in the form of taxes, “permits to deposit-refund systems”, as well as performance bonds, to be capable to influence changes on markets. The WHO also cited the benefit of cost savings with economic incentives. Contributors to pollution will pay the cost of emitting pollutants. Methods identified by the WHO include price increases (through higher taxes) in the factors of production. Another method is the economic incentive to refund those who invested in ways and means to actually lower emission of pollutants. There are also investment incentives to encourage technological advancements that can stop air pollution using Electric Vehicles (EVs). But there are perverse economic incentives, like those also identified by the WHO, when a government decides to subsidize exploration and exploitation of some natural resources which will eventually contribute to even more pollution. Perverse economic incentives can be observed also in other concerns of a country, such as efforts to promote biodiversity. When there are economic incentives to increase farm production by flexible means, owners of farms can resort to the use of substantial chemicals for the artificial increases in nutrients of the soil. These chemicals will then “kill” beneficial organisms living on the soil. Biodiversity will be prevented instead of being promoted. Another example of perverse economics not related to air pollution would be in the plan to privatize some jails. Economic incentives can be made because it will cost more for the government to produce newer and bigger prison compounds than signing a contract with the private sector to accommodate the increasing number of prisoners. But encouraging the use of private contractors to help decongest the penitentiary facilities can result in the possible higher rate of prison jailbreaks or even increase in crime rates and prisoners as soon as society learns about better facilities in prison. This was probably the fear behind the report of “The Economist” (2010). Perverse economic incentives can include bonuses or subsidies. According to Flynn (2009), whenever bonuses, whether in the form of cash or stocks, are given, it does not mean that the employees will work for the achievement of goals after receiving extra rewards. They can actually allow things to first go worse and make it appear that their services are so valuable for purposes of solving the identified problems, when, in fact, the bonuses encourage them to create problems that they themselves can surely solve in order to gain another set of bonus. Flynn (2009) also gave the example of economic incentives like Medicare and Medicaid which were observed to have encouraged doctors making it a practice not to provide preventive measures for patients. After all, patients go to doctors when they get sick. 4. More Recent Economic Incentives & Perverse EIs: Welfare Service Benefits More current perverse economic incentives in the USA are the Welfare Service benefits being used partly for political reasons and partly to alleviate social unrest during the time when economic conditions have caused high unemployment rate. While some leaders believe that increasing the budget for social welfare is necessary due to rising poverty, hunger, malnutrition, calamity and health problems, others contend that doing so would provide economic incentives inevitably resulting into laziness, heavy dependence on government, BOP deficits and the rise in total debts of the government. In other words, increasing Welfare Service budget was criticized as a perverse economic incentive. However, the purpose of Welfare Service benefits in the USA is not just to assist those in need, especially those experiencing poverty and unemployment, but also to allow underprivileged citizens to find the way to recover, live a normal life while experiencing economic problems and to serve as a means for them to explore and discover a long term employment or business opportunity. There is no intention to make people dependent on Welfare Service benefits. 5. More Recent Economic Incentives & Perverse EIs: Alternative Source of Energy Following the never ending price increases and fluctuations in prices of oil, household income could buy less fuel, less basic necessities and fewer luxuries. Cost of production and cost of transportation obviously kicked up prices. And so the government thought of economic incentives to find alternative sources of energy. One of them involved the Solar Panels manufacturing industry. Solar panels convert the sunlight into power source. Thus, US government guaranteed $535 million loan in favor of Solyndra by September 2009. This was an economic incentive through the Department of Energy. But Solyndra went bankrupt 2 years later. It could not compete with China’s solar panels manufacturing. Further analysis shows it cannot be the fault of the investors because the Chinese subsidized the business of manufacturing solar panels in order to make their prices considerably lower. Black (2011) explained that the US government should in fact also subsidize such green energy programs. On the other hand, the reason for economic incentive to become perverse lies partly in the tight budget of the US government. Economic recession since 2009 led to high unemployment rates. Americans could not access loans and didn’t have funds for solar panels during the economic crisis. Banks were strict in their lending practices, primarily because the banks wanted to remain liquid. They trapped most of the stimulus funds in their balance sheets and gave priority lending to large corporations that needed to be rejuvenated for recovery after the recession. Nonetheless, government launched more economic incentives in favor of green energy. West (2012) identified 8 EIs. These partly consisted of tax credits, home loans for replacement of windows, provision of insulation, tax rebates and so on. Yet there was not enough demand for Solyndra solar panels. The final outcome was a perverse economic incentive. Hundreds of millions of US dollars in guaranteed loans were lost. There are 500 renewable energy generation projects in 44 States that have been entitled to $3 billion of Tax Credits. 183 manufacturing projects in 43 States were also granted tax credits worth another $2 billion. For the solar power energy sector, government has realized it will take some time to fully develop the industry. As of 2012, solar power has been generating less than 1% of the generation requirement. And so government has also given incentives to develop Wind Power. $3 billion were reported as tax credits for the benefit of 100 wind-based projects in 30 States. All these details can be found on the website of Recovery.gov. 6. Economic Incentives to Promote Production and Use of Electric Vehicles (EVs) Petroleum consumption can be reduced by 30% in the USA if vehicles are run by electricity. As an incentive to the manufacturers of vehicles, the US government launched a pilot project within the framework of which the government will eventually buy hundreds of thousands of electric vehicles to replace the gas consuming government vehicles. US GSA (2011) announced that “Washington, Detroit, Los Angeles, San Diego and San Francisco” would be the location of that pilot program. President Obama wanted to place 1,000,000 electric vehicles on the road to help reduce dependence on oil and to encourage the private sector to eventually change its vehicles. There will be adequate supply of Electric Vehicles (EVs) and infrastructure development for EVs in the nearest future. The government alone can lower production cost due to economies of scale assured by its own demand. This should encourage people to buy EVs. Will there be a perverse economic incentive as a result of all these actions? Only time will tell. Economic incentives are always initiated to get benefits up ahead but no one knows what the impact of EIs on the industries involved might be. Works Cited Black, William K. “Solyndra: Liar’s Loans.” Credit Writedowns. 27 Sept. 2011. Web. 14 Mar. 2012. “Colombia: Perverse Economic Incentives for Oil Palm Plantation.” World Rainforest Movement. WRM’s Bulletin No. 47. June 2011. Uruguay. Web. 13 Mar. 2012. “Economic Instruments as Lever For Policy.” The Health and Environment Linkages Initiative (HELI). World Health Organization, 2012. Web. 16 Mar. 2012. “Electric Vehicle Pilot Program.” US General Services Administration. 1 June 2011. Web. 13 Mar. 2012. Flynn, Sean Masaki. “Perverse Incentives.” Forbes.com. 19 Feb. 2009. Web. 15 Mar. 2012. Hahnel, Robin. Green Economics: Confronting the Ecological Crisis. M. E. Sharpe. 1 Dec. 2010. Print. Harrington, Winston, and Richard D. Morgenstern. “Economic Incentives Versus Command and Control.” Resource for the Future. RFF Press, Washington DC. 2004. Web. 13 Mar. 2012. Lindbeck, Assar, Sten Nyberg, and Jorgen Weibull. “Social Norms and Economic Incentives in the Welfare State.” The Quarterly Journal of Economics 1999. 114 (1): 1-35. Print. Spellberg, B., P. Sharma, and J. H. Rex. “The Impact of Time Discounting on Economic Incentives to Overcome the Antibiotic Market Failure.” Antibacterial R &D Incentives Summary. Nature Reviews Drug Discovery. 10 (727-728). October 2011. Print. “The Perverse Incentives of Private Prisons.” Democracy in America: American Politics. The Economist. Iowa City. 24 Aug. 2010. Web. 15 Mar. 2012. West, Larry. “Get Tax Incentives For Green Living.” About.com. 2012. Web. 15 Mar. 2012. Read More