A consumer might respond to a negative incentive because it could be a chance to…

A. Purchase a very popular item.

B. Buy a good at a cheap price.

C. Take advantage of a sale.

D. Avoid additional charges.

The answer is D: Avoid additional charges. A consumer might respond to a negative incentive because it could be a chance to avoid additional charges. Let’s understand the concept of negative incentive and its effect on consumers.

Effect of incentives on consumers

In the study of modern economics, modern consumer is concerned about the remunerative incentives. The classical incentive analysis structure comes from the Walrasian chart of famous supply and demand curve that predicts that the movement of the market around the equilibrium.

Talking about the incentive types, there are in a total of two different categories namely positive incentive and negative incentive. However, among both the incentive types, the positive incentive is the most popular form.

It includes the benefits achieved by the companies, employees, and even the economy. But still, negative incentive and its effects cannot be neglected.

At times, it also happens that the incentive that is beneficial for the company or the economy might not possibly turn out to be the same for the consumers or employees. But for understanding the incentives more accurately, it is necessary to know what economic incentives are basically.

An economic incentive is a form of appraisal provided to the consumers or individuals for encouraging them to behave or perform in a particular way. The incentives are widely given in the form of monetary rewards, but at times it can also be in the form of products and services.

Other than this, other incentives come under the category of negative incentive which is mostly manifested. It is the incentives that change the behavior of the employees which also comes with an impact on the demand.

Effect of Negative Incentive on Demand

According to a study, the economic incentive comes with a positive impact on the demand of the consumers, and also has a deep impact on their decisions.

A study carried out like the Geller in the year 2002 came up with results that the economic compensation came with an influence that lasted for the limited time period. However, the positive impact it gave up disappeared soon.

Considering the case of saving electricity in California, a program was handled for the same in which the consumers of the household were given an offer of 20% discount in the form of an incentive from the electricity bills. This means the consumers had to come up with a reduction in the usage of electricity during summers which would save around 20%.

According to the results, nearly one-third of the households reduced their consumption in the summers. However, if the program is considered in terms of economic incentive, it came up in the form of a discount on the bills of electricity as another campaign also accompanied the program.

Another similar program was carried out in California named 20/20 Rebate program in the year 2012. An approximate number of 181000 homes participated in the electricity drought program in which the consumer successfully reduced the consumption of electricity by 10% in the month of June and 8.5% in the month of July.

The sum up total of saving reached around 286000 dollars. In both the programs, the behavior of the public towards the incentive was quite remarkable, and it also came with an impact on the economic behavior and decisions.

Factors influencing the consumer’s economic decisions

While talking about the economic decisions carried out by the consumers, they are influenced by a number of factors which includes the role of the consumers and the economists.

As per modern economic researches, negative incentives are often more motivating than the positive incentives where people are motivated through the gains.

Negative incentives require individuals to take note of their expenditure and avoid any additional charges. Here are some of the factors that influence the economic decision of the consumer.

Budget constraints and utility maximization

With the help of a different combination of the goods and services, the consumers can increase their utility.

The combination decision regarding the goods and the services are decided on the basis of some factors that include the price of the goods and services, the income of the consumer and the preference of the consumer which is basically related with the budget constraints.

The consumers working on particular budgets are likely to be affected when the increase in the price of particular good effects the price of the other related good.

Internal influences

The internal influences of the consumers that impact the economic decision include the personality of the consumer, his habits and ethics too.

The word personality here is related to the combination of motives, attributes, behaviors and the values of the individual that are unique. This helps in determining the choice and the behavior of the individual for making different choices.

It includes both monetary and non-monetary costs or economic incentives that might lead to rational decisions. Some important points that count in internal influences include over-confidence, procrastination, self-control, mortgages, and much more.

External influences

External influence is a combination of culture and marketing. The culture can come with a deep impact on the choice of the consumers. A good example of the same can be given about smoking.

Smoking these days is considered to be a status, which was not the same previously. The movies, television shows, etc. came with a deep impact on the mind and behavior of the consumers in the form of a glamorous habit.

Marketing is also equally important as it attracts the customers towards the business and products. Marketing aims to make promotional activities and advertise the which can be a powerful communication mean.

Advertising, framing, brand loyalty, market power, etc. is also included while counting external influences of economic decisions.

Conclusion

No doubt, incentives are an important part of any economy. However, various people don’t understand the reason for the foundation of the economy.

The incentives are important to bring out the competitive environment in the market which would bring various benefits to the consumers. But when it comes to the negative incentive, they are sure to benefit the company and government.

References

  1. Consumer behavior: Taken from deloitte.com
  2. Economic Incentives: Taken from dmwalke.wordpress.com
  3. Traditional economic outlook of consumer behavior: Taken from commpap.com

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