define incentive and explain the government's incentive for this regulation.
an incentive is any factor (financial or non-financial) that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. [ [ It is an expectation that encourages people to behave in a certain way. Since human beings are purposeful creatures, the study of incentive structures is central to the study of all economic activity (both in
terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis, then, of the differences between societies (and between different organizations within a society) largely amounts to characterizing the differences in incentive structures faced by individuals involved in these collective efforts. Ultimately, incentives aim to provide value for money and contribute to organizational success..Example: Incentive Regulation in the Utility Sector Incentive-based regulation can be defined as the conscious use of rewards and penalties to encourage good performance in the utility sector. Incentives can be used in several contexts. For example, policymakers in the United States used a quid pro quo incentive when some of the U.S. incumbent local telephone companies were allowed to enter long distance markets only if they first cooperated in opening their local markets to competition. Incentive regulation is often used to regulate the overall price level of utilities. There are four primary approaches to regulating the overall price level: rate of return (or cost of service) regulation, price cap regulation, revenue cap regulation, and benchmarking (or yardstick) regulation. With benchmarking, for example, the operator’s performance is compared to other operators’ performance and penalties or awards are assessed based on the operator’s relative performance. For instance, the regulator might identify a number of comparable operators and compare their cost efficiency. The most efficient operators would be rewarded with extra profits and the least efficient operators would be penalized. ] ]
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