Question

Explain why economists insist that ‘incentives matter.’ In your response, identify the roles of property rights, market prices, profit and loss in providing incentives that influence individual behavior

Answer 1

Incentives encourages a person to perform better . Without proper reward the urge to work hard vanishes and people feel like shirking or spending more time in leisure . As for example the Laffer curve tells us how high tax rates can diminish marginal tax revenue as people avoid work when they have to pay high taxes on their hard earned income .

Private property rights is an assurance that no other person can tresspass or encroach upon the property , even the government . So setting up of firms and production activities become more secured . This propels economic growth and prosperity .

Market prices act as signals for producers and consumers . Free market without government intervention allows producers to charge according to demand and thus make huge profits . this works as an incentive for innovation and production . Government price controls diminishes this incentive .

From profits to wages , rewards etc everything acts as an incentive for economic activities . Market distortions or heavy duty on these incentives causes retardation of growth .