The crucial role of public policy should be to foster an environment that promotes healthy growth in society. Free societies let individuals make decisions based on their own knowledge and local situation. Market prices convey much of this knowledge. When we respond to market prices, we coordinate our specialized knowledge with the specialized knowledge of others. Freedom to try, and ownership of the results, are essential elements of this process.
People respond to incentives in both private enterprise and public life.
Incentives help explain why policy changes prompt people to make different decisions. In a true market setting, enterprises have an incentive to serve others well in order to profit. Without other support, they must serve adequately or fail. It is crucial to distinguish between good intentions and actual effects. We cannot truly know what values a policy promotes unless we understand how it affects knowledge, discovery, and incentives.