Chapter 2: Incentives Matter
1. What problem do communal resources present, as compared to privately owned resources?
2. Why do incentives matter? Use an example from the book as well as from your own life to explain your response.
3. The law of unintended consequences states that “actions of people- and especially of government- always have effects that are unanticipated or unintended” (The Concise Encyclopedia of Economics). While important to recognize, politicians often fail to understand its significance. Provide one example mentioned in the reading that illustrates this point.
4. “Capitalism can be a brutal, cruel process… But ‘creative destruction’ (Joseph Schumpeter) is a tremendous positive force. Competition means losers, which goes a long way to explain why we embrace it in theory and fight it bitterly in practice.” Explain this statement, and give an example, pg.47.
5. Explain how each of the following relates to the efficient outcomes in a market economy:
- Adverse selection
- Perverse incentive
- Principle agent problem
- The prisoner’s dilemma