When supply or demand changes, market prices adjust, affecting incentives. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy. 13 Income for most people is determined by the market value of the productive resources they sell. What workers earn depends, primarily, on the market value of what they produce and how productive they are.
Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.
There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income. 17 Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.