Macro -- Opportunity Costs

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Opportunity Cost

the cost of something is what you give up to get it

The opportunity cost of something is...

the value of your next best alternative

When do incentives work?

-Low/High prices incentivize/disincentivize buyers -High/Low prices incentivize/disincentivize sellers EX: sick pay leads to more absences

Economic Value =

MB - MC

When don't incentives work? (part 3)

when people are addicted EX: Paying cigarette smokers to quit works well in the short run, but poorly in the long run

When don't incentives work? (part 1)

when they are poorly designed/aligned: (incentives are still "working," just not how we want) EX: Incentivizing researchers per article makes them churn out poorly cited papers

When don't incentives work? (part 2)

when they crowd out internal motivation EX: Students who were paid a small amount collected less money for charity than volunteers


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