Economists love to complain that politicians don't pay enough attention to economic incentives when they write laws. Our Planet Money team hears this criticism so often that it's taken to asking economists: How would you run things?

Well, today, Chana Joffe-Walt introduces us to an economist who is trying to run his own economically pure society, his family.

CHANA JOFFE-WALT: The first opportunity Joshua Gans had to test the power of economic incentives in a controlled environment came when his daughter, B., was 2. Joshua's an economist, an expert in incentives. He talks about them all the time in the classroom at the University of Melbourne.

So his daughter B. was 2, and in diapers. Joshua wanted her not to be in diapers anymore. B. was perfectly happy with the system that existed. So Joshua designed an incentive: B. would receive a jelly bean every time she went to the toilet. New policy in place, B. suddenly had to go to the toilet a lot.

A few years later, her brother needed to be potty trained. And B., who is now 11 years old, jumped into the incentive system once again.

Ms. B. GANS: Oh, I remember that.

(Soundbite of laughter)

Professor JOSHUA GANS (Management Information, Melbourne Business School): You want to say what happened when your brother was toilet-trained?

Ms. GANS: Well, I realized that if I helped my brother go to the toilet, I would get rewarded, too. So I realized that the more that goes in, the more comes out. So I was just feeding my brother buckets and buckets of water until, I guess...

(Soundbite of laughter)

Ms. GANS: Yes.

Mr. GANS: That was my idea. It didn't really work out too well.

JOFFE-WALT: As B. grew up, Joshua faced a new problem. She wanted things: yo-yos, candy. She went on a tear about needing some Heeleys, those shoes with wheels on them. So Joshua began to think about a new economic tool, allowance.

Parents generally use allowance in two ways: As a reward for services provided such as using the toilet or, say, washing dishes or making the bed. Joshua had ruled that way out after B. pumped her brother full of water.

So the second approach to allowance is to use it as a tool to teach kids budget constraints. Joshua told B.: Okay, anything you want that is nonessential, you buy it with your own allowance.

Mr. GANS: However, that just doesn't quite occur. A child comes forward with a very nice dress that she's found in the store, and we think: Oh, we agree that's nice as well. And all of a sudden, the credit card's out.

JOFFE-WALT: If she comes forward with a dress that you don't like, then it has to go through allowance?

Mr. GANS: Ah, ones we - yes, ones we don't like, then it's far more likely to go straight to the allowance.

JOFFE-WALT: But that seems like that gets in the way of the idea of teaching budget constraints, right? If you have arbitrary rules about what you have to pay for yourself and what your parents pay for.

Mr. GANS: It is very difficult indeed.

JOFFE-WALT: This, it turns out, is a problem governments in a free market face all the time. People in society want things leaders don't always like - things that harm the environment, things that are bad for society, like drugs or candy. B. tells me her dad has a rule about candy.

Ms. GANS: If you want to buy candy with your allowance, you have to pay to your parents and 100 percent health tax.

JOFFE-WALT: Just as Joshua subsidizes dresses he likes, he taxes candy. He tried to calculate how much B.'s candy consumption would add to his health costs, for instance, increased dental visits, say, and he landed at 100 percent, it's a pretty hefty tax. But you know what? It worked.

Mr. GANS: That's it. I've no revenue from the health tax whatsoever which is a bit of a shame...

(Soundbite of laughter)

Mr. GANS: ...because this might have been the way to claw back the enormous allowance that she's getting.

(Soundbite of laughter)

JOFFE-WALT: You've never paid the health tax?

Ms. GANS: Never ever.

(Soundbite of laughter)

Ms. GANS: I realized, well, that's just a rip-off. Why would I want the candy then?

JOFFE-WALT: Of course, just as people evade government regulation by crossing state lines for cigarettes or fireworks, B. can go to her grandmother's for tax-free candy. Economists call this leakage.

Parents can design their own rules, but the scarce resource of a parent and governments, for that matter, too, is attention. Two-year-olds seem to have unlimited time to figure out how to use regulation to their benefit. That's something they share with, say, bankers.

Mr. GANS: When it comes down to it, the policies need constant adjustment. It's actually an issue of management rather than just setting the parameters correctly.

JOFFE-WALT: Joshua, still an economist and a parent, remains faithful to the idea of incentives driving behavior. But he's a little more weary about his ability to use them to get what he wants.