(1) Importance of Incentives - For some time now I have been trying to teach my daughter, Maggie, to count. I had only been able to get her to count to three. Being a two-year-old, she has a particular way of speaking. When she wants to say the number "three", she doesn't just say "three", but instead counts to three: "one, two, three". After dinner I told her she could have a dessert. Specifically, she could have M&M's. When I asked her how many M&M's I should give her, she astonished me by saying: one, two, three, four, five, six, seven, eight, nine, ten! The reward for counting finally got her to count higher than three!
(2) Indifference Principle: A local gas station recently announced it was giving away free gasoline. Do consumers benefit from this? The answer is no, for most people. After the announcement of free gas on the radio, large flocks of cars bolted to the station. In their effort to get free gas, they caused a wreck which damaged eight vehicles. Moreover, there was a terribly long line. The line was so long that many of the people who parked their car in the line soon left. The Indifference Principle states that even though the gas is free, people should be indifferent between getting their gas for free at this station, paying the cost of car wrecks and long waiting lines, or getting gas at another store where the gas comes at a price, but there are no wrecks and no lines. A similar situation exists if there is an unexpected huge demand for gas, like if a hurricane is approaching and the population must evacuate, but a gas does not price-gouge.