Social Rewards, Externalities and Stable Preferences

This paper examines the role of social rewards as a corrective mechanism for activities which generate externalities. The focus of this paper is the circumstances under which social rewards provide effective and feasible incentive mechanism that may replace laws and regulations. In particular, social mechanism is effective only in a society in which individuals care about their standing in the society. Thus, as part of OUT analysis of the effectiveness of social mechanisms we address the question: "why should a selfish individual care about what other people think about him?". The purpose of this paper is to characterize the circumstances in which evolution would lead to the survival of socially minded individuals, even though relative fitness is determined only by economic payoff. The paper identifies an interesting asymmetry. It is possible to use social mechanism to induce individuals to increase activities which generates positive externalities while it is impossible to induce the* to curtail activities which cause negative externalities.