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Healthy Incentives

Oct 24, 2010 • Behavioral Economics, Businesses, Macroeconomic Measurement, Regulation, Thinking Economically • 113 Views    No Comments

What happens in a school cafeteria when apples are placed in bowls rather than on a metallic pan? Sales more than double. Require trays? Students eat 21% more salads. Call corn “creamy” and more people ask for it. As displayed by the NY Times op-ed, “Lunchline Redesign”, school lunch decisions change when the incentives change.

This takes me to a recent Brookings Institution paper on obesity. With two-thirds of all adults in the U.S. overweight and one-third obese, the impact is considerable. All of us would assume that medical costs are affected by obesity-related diseases. Also though, the paper explains that productivity, transportation, and human capital suffer. Whether looking at extra sick days, extra fuel costs, or less education, the cost of obesity affects our economy.

Which incentives might make school cafeteria managers implement changes that encourage healthy eating decisions?

The Economic Lesson

An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with obesity, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of “lunchline redesign.”

How to diminish a negative externality? Increase its source’s cost. How to encourage a positive externality? Make it cheaper to create.

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