The author stresses the use of incentives to fix problems. Whether we address it or not, self-interests run the economy; people are more likely to work harder and do a better job if they're benefiting more.
One problem that desperately begs for incentives is the job market in education. Teacher's salaries, or at least for public schools, are for the most part determined by factors that are irrelevant to the performance of the teacher in the classroom. This is a problem because those students who have the potential to be great teacher take other jobs because they're following the higher pay. The brightest students don't always go into education because they most likely excel at other things, and teachers don't get paid enough for the work that they do. Incentives could fix this. If students had a more persuasive reason to become teachers, they would. This could potentially create better schools, generate better test scores and produce more intellectual students in general.
The problem with incentives though is "the law of unintended consequences". With the example of the smog over Mexico City, detailed analysis must be performed before enacting a law such as the driving day limitation. When human behavior is manipulated, sometimes an unpredictable factor comes into play and skews the incentives towards an unpredictable outcome. Similarly, sometimes people act in a way that is completely rational, and they're incentives are legitimate, yet they're worse off.
The prime example of this is the "prisoner's dilemma". The two men who were arrested for murder are both given the same incentive: if one rats the other out, the confessing prisoner will only have a three year sentence. The catch is however, if both men confess to each other's crime, then they're both sentenced to twenty some year in prison. And if neither of them talk, they'll both be out of jail within five years. Both weight the options and both act in rational self interest and rat each other out, so they're both sentenced for twenty-five years, yet they could've been better off if they kept their mouths shut.
Incentive is a powerful tool that can be utilized to manipulate positive outcomes and control behaviors in markets.
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