This is probably the most important guidepost in economic thinking. It is sometimes called the basic postulate of all economics. As the personal benefits from an option increase, a person will be more likely to choose it. On the other hand, as the personal costs associated with an option increase, a person will be less likely to choose it. This guidepost also applies to groups of people, and suggests that making an option more beneficial will predictably cause more of them to choose it. Similarly, making an option more costly will cause fewer of them to choose it.
This basic idea is a powerful tool because its usefulness is practically universal. Incentives affect behavior in virtually all aspects of our lives, ranging from market decisions about what to buy to political choices concerning for whom to vote. If beef prices rise, making beef consumption more expensive relative to other goods, consumers will be less likely to buy it. The “incentives matter” postulate also explains why a person would be unlikely to vote for a political candidate who, if elected, would raise taxes to fund a new government program he or she didn’t like very much.
Most errors in economic reasoning occur because people overlook this postulate or fail to apply it consistently. With economic applications generally focusing on people trying to satisfy material desires, casual observers often argue that incentives matter only in cases of human selfishness. This view is false. People are motivated by a variety of goals, some humanitarian and some selfish, and incentives matter equally in both. Even an unselfish individual would be more likely to attempt to rescue a drowning child from a threefoot swimming pool than the rapid currents approaching Niagara Falls. Similarly, people are more likely to give a needy person their hand-me-downs rather than their favorite new clothes.
It is clear that incentives, whether monetary or nonmonetary, matter in human decision making. People will be less likely to walk down a dark alleyway than a well-lit one; they will be more likely to take a job if it has good benefits and working conditions than if it doesn’t; and they will be more likely to bend down and pick up a quarter lying on the sidewalk than they will a penny. Even a person who normally bends down to pick up pennies on the sidewalk probably would be less likely to if late for an important appointment, or on a first date.
Just how far can we push the idea that incentives matter? If asked what would happen to the number of funerals performed in your town if the price of funerals rose, how would you respond? The “incentives matter” postulate predicts that the higher cost would reduce the number of funerals. While the same number of people will still die each year, the number of funerals performed will still fall as more people choose to be cremated or buried in cemeteries in other towns. Substitutes are everywhere-even substitutes for funerals.

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