Incentives in markets

Incentives drive the way individuals and businesses behave – even when we don’t see that
the incentive exists.

Financial incentives
Examples of financial incentive,
When there is a shortage of a good, its market price will rise, the opportunity cost
goes up and there is a incentive for us to consume less. At the same time, there is
an incentive for producers to produce more since the price is high and it will turn
out to be more profitable to produce
Other examples of financial incentives include wages, bursaries (scholarships) to
students, and tax relief on investment for business

Non-Financial incentives
Beyond monetary gains, non-financial incentives play an important role. For example,
Actions like supporting a charity, backing a football team, or making decisions
based on personal values are driven by non-financial incentives.

Perverse incentives
A perverse incentive in the market refers to a situation where the design or
implementation of incentives leads to unintended and undesirable outcomes
For example,
Making cars safer may encourage people to drive faster.
Increasing top rates of income tax could lead high earners to work less or find
ways to evade taxes, resulting in reduced overall tax revenues.

Top rates of income tax: income tax rate of those individuals who are in high earning
bracket