Incentives and Economics

In my textbook, I describe the economic way of thinking as the 3 I's: incentives, interactions, and indifference. Saying "incentives matter" is no profound statement, but the difference between economists and non-economists is that economists (as Steven Landsburg puts it) insists on taking incentives seriously at all times.

Thus, when designing health insurance plans a good economist is likely to focus on designing incentives that lead to good health and, correspondingly, lower health care costs. This is exactly what Safeway has done, as described in the Wall Street Journal here. The author argues that with the proper incentives, insurance policies with better incentives can reduce health care costs by 40%.

This article is a good tool for articulating to students the rewards associated with smart incentives.