Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 1 - Part I - Ten Principles of Economics - Questions for Review: 4

Answer

Policy makers consider incentives because they assume that individuals are rational and will respond to incentives by comparing costs and benefits.

Work Step by Step

An incentive is something that encourages an individual to act in a specific way. For example, when a price rises there is smaller incentive for a person to buy the good, and vice versa. This explains why policy makers carefully consider the price of their products - because it will have a direct flow on to the amount of the good that will be consumed.
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