D2.Eco.1.9-12: How Incentives Shape Choices, Policies and Their Costs and Benefits

Overview

Lesson Procedure

75-90 minutes of class time across 5 phases.

1. Warm-Up10 minutes
2. Direct Instruction20 minutes
3. Guided Practice15-20 minutes
4. Independent Practice15-20 minutes
5. Closure15-20 minutes

1. Warm-Up10 minutes

   Warm-Up Prompt

   "Your school decides to give a free lunch to every student with a perfect attendance record for the month. List three ways students might respond. Which responses would the principal want, and which might surprise her?"

   Collect answers in two columns, intended and unintended. Expect ideas such as coming to school sick, which could spread illness, or forging notes. Introduce the term incentive: anything that rewards or penalizes a choice and so changes how likely people are to make it. Tell students that D2.Eco.1.9-12 asks them to trace how incentives shape choices, how those choices lead to policies, and who gains and who pays as a result.

2. Direct Instruction20 minutes

   Key terms for D2.Eco.1.9-12 (working definitions)

   Term	Meaning	Example
   Incentive	A reward (positive) or penalty (negative) that changes the benefit or cost of a choice	A 10-cent refund for returning a bottle
   Policy	A rule or program adopted by a government or other institution to reach a goal	A tax, a subsidy, a license rule, a grant condition
   Concentrated and dispersed effects	Effects that are large for a few people, or small for each of many people	A rule that gives a few firms a lot and costs each buyer a little
   Unintended consequence	A result of a policy that its designers did not plan or expect	People bricking up windows to avoid a window tax
   Conditional grant	Money offered by one government to another on the condition that it adopts a rule	Federal highway funds tied to a state law

   Part 1: The incentive chain. Show Diagram 1. Incentives change choices; choices by many people create problems or pressures that lead to policies; policies create costs and benefits for different groups, and also new incentives. Point out that incentives act on policy makers too: a group that stands to gain or lose a lot from a rule has a strong reason to organize and lobby, while a large group that loses a little each may not bother. Economists such as Mancur Olson, in The Logic of Collective Action (1965), developed this idea.

   Part 2: Four cases. Work these examples with the class. For each, ask the four questions: incentive, responses, gains and costs by group, new incentives.

   • Historical: England's window tax (1696-1851)

     From 1696 to 1851, England taxed houses partly by their number of windows. Glass and windows were a rough sign of wealth, and they were easy for tax collectors to count from the street. How did householders respond, and who bore the costs?

     Result: Many householders bricked up windows to pay less, the response the tax rewarded. The government collected less than it would have if no one had changed their behavior. Tenants in crowded buildings lost light and fresh air, a health cost that reformers later blamed on the tax, which helped bring about its repeal in 1851. Landlords saved money; renters paid in health. The incentive worked on behavior, but not in the way anyone intended.

   • Deposit-refund law: who gains and who pays (invented numbers)

     In 1971 Oregon became the first state to pass a container-deposit law, or "bottle bill." Invented example: a state adds a 10-cent deposit to each can and bottle. In one month, 2,000,000 containers are sold and 78% are returned. How much is refunded, how much is never claimed, and which groups gain or pay?

     Result: Returned: 0.78 x 2,000,000 = 1,560,000 containers, so $156,000 refunded. Not returned: 440,000 containers, so $44,000 in deposits never claimed. Buyers who return containers break even; those who throw them away pay 10 cents each. People who collect cans earn money, stores bear the work of taking returns, and the public gains from less litter.

   • A conditional grant today (real rule, invented state)

     Under 23 U.S.C. 158 as amended in 2012, the U.S. Secretary of Transportation withholds 8 percent of certain federal highway funds from any state where people under 21 may legally buy or publicly possess alcohol. Invented example: a state's apportionment under those programs is $650 million. What would it lose?

     Result: 0.08 x $650 million = $52 million a year. The state's lawmakers weigh that loss against their own view of the right policy, and groups that depend on highway spending, such as road builders, gain a reason to lobby them. A grant condition changes the incentives of governments, not only of individuals.

   • Concentrated benefits, dispersed costs (invented)

     Invented example: a city caps the number of taxi licenses at 400. The cap keeps fares about $1 higher per ride on 2,000,000 rides a year. How much extra do riders pay in a year, how much is that per license holder, and which group is more likely to lobby to keep the cap?

     Result: Riders pay $1 x 2,000,000 = $2,000,000 more a year, which is $2,000,000 / 400 = $5,000 a year for each license holder. Each rider loses about $1 a ride, too little to organize over; each license holder gains $5,000 a year, enough to hire a lobbyist. The incentives of the two groups help explain why such caps can last even when many people pay for them.

   Teacher tip. Insist on groups, not "society" in general: buyers and sellers, people inside and outside the target area, taxpayers, workers, future residents. Also insist on responses: an incentive analysis predicts what people will do differently, then traces the costs and benefits of those new choices.

3. Guided Practice15-20 minutes

   Taxes as incentives. Context note: Henry George (1839-1897) published Progress and Poverty in 1879. He argued that rising land values, created by a growing community, went to landowners, and he proposed raising public revenue mainly by taxing the value of land rather than buildings, goods or wages; supporters called it the "single tax." The book sold widely, and George ran twice for mayor of New York. A few cities, mostly in Pennsylvania, have used a "split-rate" property tax that taxes land at a higher rate than buildings. Glossary: "produce" (what is produced), "capitalist" (a person who invests savings in a business), "mode" (way or method), "fellahs" (Egyptian farmers), "Mohammed Ali" (ruler of Egypt from 1805 to 1848), "the Duke of Alva" (Spanish governor of the Netherlands from 1567 to 1573), "rent" (here, the yearly value of land itself, apart from any buildings), "improvements" (buildings and other things built on land), "dog in the manger" (someone who keeps others from using what he does not use himself).

   1[...] Taxation which lessens the reward of the producer necessarily lessens the incentive to production; taxation which is conditioned upon the act of production, or the use of any of the three factors of production, necessarily discourages production. Thus taxation which diminishes the earnings of the laborer or the returns of the capitalist tends to render the one less industrious and intelligent, the other less disposed to save and invest. [...]

   2The mode of taxation is, in fact, quite as important as the amount. As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in another way, could be borne with ease. A tax on date-trees, imposed by Mohammed Ali, caused the Egyptian fellahs to cut down their trees; but a tax of twice the amount imposed on the land produced no such result. The tax of ten per cent. on all sales, imposed by the Duke of Alva in the Netherlands, would, had it been maintained, have all but stopped exchange while yielding but little revenue.

   [...]

   3[...] Taxes levied upon the value of land cannot check production in the slightest degree, until they exceed rent, or the value of land taken annually, for unlike taxes upon commodities, or exchange, or capital, or any of the tools or processes of production, they do not bear upon production. [...] It is not in any case the creation of the individual who owns the land; it is created by the growth of the community. Hence the community can take it all without in any way lessening the incentive to improvement or in the slightest degree lessening the production of wealth. [...]

   4[...] if land were taxed to anything near its rental value, no one could afford to hold land that he was not using, and, consequently, land not in use would be thrown open to those who would use it. Settlement would be closer, and, consequently, labor and capital would be enabled to produce much more with the same exertion. The dog in the manger who, in this country especially, so wastes productive power, would be choked off.

   5[...] Tax manufactures, and the effect is to check manufacturing; tax improvements, and the effect is to lessen improvement; tax commerce, and the effect is to prevent exchange; tax capital, and the effect is to drive it away. But the whole value of land may be taken in taxation, and the only effect will be to stimulate industry, to open new opportunities to capital, and to increase the production of wealth.

   [...]

   6[...] If we impose a tax upon buildings, the users of buildings must finally pay it, for the erection of buildings will cease until building rents become high enough to pay the regular profit and the tax besides. [...]

   1. The basic claim. Prompt: restate George's first sentence in paragraph 1 in your own words. Teacher note: "Taxation which lessens the reward of the producer necessarily lessens the incentive to production." If a tax takes part of what you earn by working or building, you have less reason to work or build.
   2. How, not just how much. Prompt: explain the horse comparison at the start of paragraph 2. Teacher note: a small load placed badly can hurt a horse more than a larger load placed well; in the same way, the way a tax is collected can matter as much as its size, because it decides which choices are punished.
   3. Sorting the list. Prompt: in paragraph 5, list each kind of tax George names and the choice it discourages. Teacher note: manufactures (making goods), improvements (building), commerce (trading) and capital (investing).
   4. A second example. Prompt: in paragraph 2, what does George say a ten percent tax on all sales would have done in the Netherlands, and why does that support his point? Teacher note: it "would, had it been maintained, have all but stopped exchange while yielding but little revenue": a tax on trading discourages trading so much that it raises little money. Quiz questions 1-5, 15 and 16 use Source 1.

   Other views. George's plan drew strong criticism in his own time. Critics such as the economist Edwin R. A. Seligman, in Essays in Taxation (1895), objected that singling out landowners was unjust, because many other kinds of wealth also rise in value with the growth of the community, and that a single tax on land would be too inflexible to raise more money in an emergency and too small to pay for government in new or poor farming areas. Others point out that assessors find it hard to measure the value of land apart from the buildings on it. Students should treat Source 1 as one economist's argument, not as settled fact.

4. Independent Practice15-20 minutes

   A federal incentive for the states. Context note: in the early 1980s, states set different minimum ages for buying alcohol. In 1984 Congress passed, and President Ronald Reagan signed, the National Minimum Drinking Age Act (23 U.S.C. 158), which told the Secretary of Transportation to withhold part of a state's federal highway money if people under 21 could legally buy alcohol there. South Dakota, which let people 19 and older buy beer with up to 3.2% alcohol, sued Elizabeth Dole, the Secretary of Transportation. The Supreme Court decided against the state, 7-2, on June 23, 1987. By the end of the 1980s every state had set its minimum purchase age at 21. Glossary: "spending power" (Congress's power to tax and spend for the general welfare), "inducement" (something that persuades), "coercive" (forcing), "petitioner" (the side that brought the appeal, here South Dakota), "prerogative" (a right or power that belongs to someone), "over-inclusive" and "under-inclusive" (a rule that covers people it should not, or misses people it should), "attenuated" (weak, stretched thin).

   1Congress found that the differing drinking ages in the States created particular incentives for young persons to combine their desire to drink with their ability to drive, and that this interstate problem required a national solution. The means it chose to address this dangerous situation were reasonably calculated to advance the general welfare. [...] Indeed, the condition imposed by Congress is directly related to one of the main purposes for which highway funds are expended—safe interstate travel. [...] This goal of the interstate highway system had been frustrated by varying drinking ages among the States. A Presidential commission appointed to study alcohol-related accidents and fatalities on the Nation's highways concluded that the lack of uniformity in the States' drinking ages created "an incentive to drink and drive" because "young persons commut[e] to border States where the drinking age is lower." Presidential Commission on Drunk Driving, Final Report 11 (1983). By enacting § 158, Congress conditioned the receipt of federal funds in a way reasonably calculated to address this particular impediment to a purpose for which the funds are expended.

   [...]

   2Our decisions have recognized that in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which "pressure turns into compulsion." Steward Machine Co. v. Davis, supra, at 590. Here, however, Congress has directed only that a State desiring to establish a minimum drinking age lower than 21 lose a relatively small percentage of certain federal highway funds. Petitioner contends that the coercive nature of this program is evident from the degree of success it has achieved. We cannot conclude, however, that a conditional grant of federal money of this sort is unconstitutional simply by reason of its success in achieving the congressional objective.

   3When we consider, for a moment, that all South Dakota would lose if she adheres to her chosen course as to a suitable minimum drinking age is 5% of the funds otherwise obtainable under specified highway grant programs, the argument as to coercion is shown to be more rhetoric than fact. [...]

   [...]

   4Here Congress has offered relatively mild encouragement to the States to enact higher minimum drinking ages than they would otherwise choose. But the enactment of such laws remains the prerogative of the States not merely in theory but in fact. Even if Congress might lack the power to impose a national minimum drinking age directly, we conclude that encouragement to state action found in § 158 is a valid use of the spending power.

   1The Court today upholds the National Minimum Drinking Age Amendment, 23 U. S. C. § 158 (1982 ed., Supp. III), as a valid exercise of the spending power conferred by Article I, § 8. But § 158 is not a condition on spending reasonably related to the expenditure of federal funds and cannot be justified on that ground. Rather, it is an attempt to regulate the sale of liquor, an attempt that lies outside Congress' power to regulate commerce because it falls within the ambit of § 2 of the Twenty-first Amendment.

   [...]

   2[...] It hardly needs saying, however, that if the purpose of § 158 is to deter drunken driving, it is far too over- and under-inclusive. It is over-inclusive because it stops teenagers from drinking even when they are not about to drive on interstate highways. It is under-inclusive because teenagers pose only a small part of the drunken driving problem in this Nation. See, e. g., 130 Cong. Rec. 18648 (1984) (remarks of Sen. Humphrey) ("Eighty-four percent of all highway fatalities involving alcohol occur among those whose ages exceed 21"); [...]

   3When Congress appropriates money to build a highway, it is entitled to insist that the highway be a safe one. But it is not entitled to insist as a condition of the use of highway funds that the State impose or change regulations in other areas of the State's social and economic life because of an attenuated or tangential relationship to highway use or safety. Indeed, if the rule were otherwise, the Congress could effectively regulate almost any area of a State's social, political, or economic life on the theory that use of the interstate transportation system is somehow enhanced. If, for example, the United States were to condition highway moneys upon moving the state capital, I suppose it might argue that interstate transportation is facilitated by locating local governments in places easily accessible to interstate highways—or, conversely, that highways might become overburdened if they had to carry traffic to and from the state capital. In my mind, such a relationship is hardly more attenuated than the one which the Court finds supports § 158. [...]

   Students answer on their own: (1) In one sentence each, state what the majority decided and what Justice O'Connor objected to. (2) For each opinion, name the group or government whose interests it stresses most. (3) Which part of each opinion is about the law's purpose, and which part is about its effects? Collect the answers; Quiz questions 6-12 and 17 use Sources 2 and 3.

5. Closure15-20 minutes

   An incentive that worked too well. Introduce Source 4, an invented scenario with invented data, for the quiz and homework. Students read it and study the table and Diagram 2.

   1Invented scenario, written for this page. Ridge County is a fictional rural county of about 40,000 people. For years, some people there dumped old tires in ditches and woods instead of paying the $4-a-tire disposal fee that tire shops charge. Dumped tires collect rainwater where mosquitoes breed, and they are costly to clean up.

   2Last year the county recycling center took in an average of 300 tires a month, and road crews found about 420 dumped tires a month. The center pays a recycling company $3.50 for each tire it hauls away.

   3In January the county board began paying a bounty of $2 for every used tire anyone brought to the center. Board members hoped residents would clean up dumped tires and stop dumping new ones. The center asked each person to write a home county on a sign-in sheet.

   4By April the center was taking in more than ten times as many tires as before. Some Ridge County residents were pulling old tires out of creeks and ditches to earn the bounty, and one youth club raised money that way. But more and more tires arrived by truck from neighboring Lake County, which has no bounty. Lake County tire shops, which pay about $3 a tire to get rid of old tires, began driving them to Ridge County to collect $2 a tire instead. Center staff worked overtime to keep up.

   5In May the board changed the rule: the bounty is now paid only to Ridge County residents who show an ID, for no more than 10 tires a visit. The center's records for the year are in the table below.

   Ridge County recycling center records (invented data)

   Month	Tires from Ridge County	Tires from outside the county	Total tires turned in	Dumped tires found by road crews
   Last year (average month)	-	-	300	420
   January	900	200	1,100	260
   February	1,100	800	1,900	150
   March	1,200	1,400	2,600	120
   April	1,200	1,900	3,100	110
   May (new rule)	1,250	50	1,300	130

   Invented data for Source 4. The center pays $3.50 a tire for recycling in every month, and since January it also pays the $2 bounty on each tire turned in. Last year's records did not split tires by county.

   Exit ticket: In one sentence, name an incentive from today's sources and a group that responded to it in a way the policy makers did not intend.

   Teacher note on the sources: Sources 1-3 are quoted exactly as printed; the Supreme Court text keeps its citation style, including "23 U. S. C." and "e. g." Source 1 is an advocate's argument from 1879, and the Other Views note gives its critics. The drinking-age question is presented as the Court argued it in 1987, with the majority and the dissent in their own words; the lesson takes no position on the right drinking age or on George's tax. Source 4 and all marked examples are invented.

Differentiation Strategies

Assessment Guidance

1. Question 1 of 20 · Multiple Choice

   In Source 1, paragraph 2, what happened when Mohammed Ali taxed date-trees, and what does George conclude from it?

   AFarmers planted more trees, so taxes should fall on crops BFarmers cut down their trees; a land tax twice as large did not CThe tax raised so much money that Egypt dropped its land tax DFarmers sold their land, so land taxes are worse than tree taxes

2. Question 2 of 20 · Multiple Choice

   According to Source 1, paragraph 3, why does George think a tax on land values does not reduce production?

   ALand value comes from the community's growth, not the owner's work BLandowners can always pass the tax on to the buyers of their crops CThe government would collect the tax only from farms and not from cities DLand taxes are so small that nobody would notice paying them

3. Question 3 of 20 · Multiple Choice

   Under George's plan in paragraph 4, which group would face the strongest new incentive to change what it does?

   AWorkers who rent apartments near their jobs BOwners who hold valuable land without using it CFactory owners who build new plants on their land DMerchants who import and sell goods from abroad

4. Question 4 of 20 · Multiple Choice

   In Source 1, paragraph 6, who does George say finally pays a tax on buildings, and why?

   AThe builders, because they can never raise their prices to cover it BThe government, because collecting it costs so much CThe users of buildings, because building stops until rents rise DThe owners of vacant land, because their land loses its value

5. Question 5 of 20 · Multiple Choice

   Invented example based on Source 1: a city taxes 1% of land plus building value. Owner A has a vacant lot with land worth $150,000. Owner B has a store on land worth $250,000, with the building worth $600,000. If the city switched to a tax on land only and raised the same total from the two owners, how much would Owner B pay?

   A$8,500 B$2,500 C$21,250 D$6,250

6. Question 6 of 20 · Multiple Choice

   According to Source 2, what incentive did differing state drinking ages create before the 1984 law?

   ABars in states with an age of 21 lowered their prices BParents moved to states that had an age of 21 CStates raised their ages to attract more tourists DYoung people drove to border states with lower ages

7. Question 7 of 20 · Multiple Choice

   In Source 2, what did South Dakota point to as evidence that the program was coercive, and how did the Court respond?

   AIts success; the Court said success does not prove coercion BThe size of the penalty, which the Court agreed was too large CComplaints from young drivers, which the Court set aside DA close vote in Congress, which the Court said it could not review

8. Question 8 of 20 · Multiple Choice

   Why did the majority in Source 2 conclude that the amount at stake did not amount to coercion?

   AThe state had agreed to the law before it was passed BLosing 5% of certain highway funds left the choice with the state CThe Twenty-first Amendment gave Congress the power to set drinking ages DMost of South Dakota's highways were paid for by the state itself

9. Question 9 of 20 · Multiple Choice

   Invented example: a state receives $600 million a year under the highway programs named in 23 U.S.C. 158. How much more would it lose under today's 8% rule than under the 5% rule described in Source 2?

   A$30 million B$48 million C$18 million D$78 million

10. Question 10 of 20 · Multiple Choice

    In Source 3, what does Justice O'Connor mean when she calls the law "over-inclusive"?

    AIt covers teenagers who are not about to drive on interstate highways BIt covers too many kinds of drinks, including some with almost no alcohol CIt applies to adults over 21 who drink and drive DIt takes too large a share of a state's highway money

11. Question 11 of 20 · Multiple Choice

    What point does O'Connor make with her example of highway money tied to moving the state capital (Source 3, paragraph 3)?

    AStates should move their capitals closer to interstate highways BMoving a capital would make highways less safe for young drivers CCongress could steer almost any state policy with such loose links DCongress had already used highway money to move several state capitals

12. Question 12 of 20 · Multiple Choice

    Using Sources 2 and 3, which group bore a cost of the national drinking age policy?

    AAdults aged 18 to 20 in states with a lower drinking age BHighway construction workers in every state that complied CDrivers over age 21, who paid a new federal fee DThe federal government, which had to build new highways

13. Question 13 of 20 · Multiple Choice

    Use the table in Source 4. What did the county pay in bounties and recycling fees together for the tires turned in during April?

    A$6,200 B$10,850 C$17,050 D$1,050

14. Question 14 of 20 · Multiple Choice

    Use the table in Source 4. About what share of the tires turned in during April came from outside Ridge County?

    AAbout 18% BAbout 39% CAbout 158% DAbout 61%

15. Question 15 of 20 · Short Answer

    Using Source 1, name one group that would gain and one group that would lose if George's land-value tax replaced taxes on buildings. Explain the incentive each group would face.

    Show model answer

16. Question 16 of 20 · Short Answer

    In paragraph 6, George explains what happens when buildings are taxed. Using the same reasoning, explain why he thinks a tax on land values works differently. Then name one group likely to lobby against his plan, and explain its incentive.

    Show model answer

17. Question 17 of 20 · Short Answer

    Sources 2 and 3 describe the same incentive in different words. Explain how the majority and Justice O'Connor each describe it, and which description you find more persuasive, and why. Either judgment can earn full credit.

    Show model answer

18. Question 18 of 20 · Short Answer

    Using Source 4, explain how the $2 bounty changed the choices of three different groups. Use at least two numbers from the table.

    Show model answer

19. Question 19 of 20 · Short Answer

    In May, Ridge County limited the bounty to residents with an ID and 10 tires a visit. Using the table, evaluate the change: what did it cost and save compared with April, and who gained or lost?

    Show model answer

20. Question 20 of 20 · Short Answer

    Choose two of the four sources. For each, identify the incentive, the choice it influenced and the policy involved, then explain one way the costs and benefits fell unevenly across groups.

    Show model answer

These standards connect to D2.Eco.1.9-12: prerequisites to review first, parallel standards at the same level, and next steps that build on it.

Standard text: National Council for the Social Studies (NCSS), The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History (Silver Spring, MD: NCSS, 2013). NCSS was not involved in the production of this lesson and does not endorse it.