"People respond to incentives"
January 15, 2013
The phrase "people respond to incentives"
is a reference to a widely-used introductory textbook about economics written by Harvard professor Greg Mankiw. And it's true -- normal, self-interested people will behave differently if a different set of incentives is put before them. And it is with that understanding of human nature that the city of Lincoln is considering a rate structure for water use
that would help to discourage people from using large amounts of water when the city's supplies are low due to drought. Or, put another way, to encourage them to conserve by giving them financial incentives to do so. It's only at the study stage for now and will be more broadly discussed in a few weeks, but setting a rate structure that reflects the simple reality that a price that is too low when demand remains high and supply falls too low will only result in shortages -- or, as water customers might know them, mandatory water-use restrictions
. Prices that fluctuate in order to incentivize conservation may be a way to escape mandatory restrictions.