Cambridge International as and a level Economics Ebook

Problems of undesirable incentives
A further problem arises with government intervention in 
the economy due to the creation of undesirable incentives. 
Th
ese can create ineffi
ciencies. Some examples of the ways 
in which this can happen are as follows:
■
The imposition of taxes can distort incentives. As we have 
seen, the most obvious example of this is the possible 
impact of an income tax upon the incentive to work. 
High marginal rates of taxation can create disincentives 
for people to work harder and gain more income. If this 
happens, then scarce resources are not being used to their 
best eff ect and there is ineff iciency. A similar point can be 
recalled from the earlier discussion of the deadweight loss 
of a tax. The disincentive to consume and produce created 
by the tax led to the wrong amount of a product being 
produced.
■
Politicians may be motivated by political power rather 
than economic imperatives. Politicians are oft en seen 
as being motivated principally by the desire to remain in 
government. If this is so, then economic policies may be 
designed by governments to try to retain power rather than 
to try to ensure maximum eff iciency in the economy. For 
example, road pricing is a very unpopular tax in the eyes 
of car users despite its tremendous potential to reduce 
congestion and hence correct market failure. It is likely to 
be avoided due to a government’s fears that its introduction 
could lead to a loss of votes.
■
Those running public services may have inappropriate 
incentives. Once products are provided by the government, 
then the profit motive of the private sector is largely 
removed. The question then remains as to what may 
motivate those in charge of providing public services. There 
is no entirely clear answer to this question. At its worst, 
it could become a total lack of incentive to produce the 
product well or attempts to defraud the system.