The role of government, then, is to modify the natural market structure so as to skew and channel the natural incentive structures it generates into socially positive directions. Government programs, whenever possible, should try to achieve their objectives through such manipulation of market-generated incentives. On the other hand, government programs which encourage private investment, or which subsidise education, act in the second way. The idea of incentive structures has relevance far outside the field of market economics. Legislators should be intensely conscious, when formulating any new public policy, of the new incentives it will engender in the population, and the existing incentives it will modify or eliminate.
Many public policies succeed or fail because of the incentives they generate, often inadvertently.
The creation of unforseen negative consequences through the generation of unanticipated incentives is one of the major hazards of all policy-making. This is particularly true in the area of social programs. Programs designed to shield people from misfortune often have all sorts of adverse consequences because of the degree to which they create incentives towards waste, sloth, and fraud. For example, minimum wage laws actually create an incentive for employers not to hire certain people, thus creating a permanent underclass of the unemployable. Conversely, most welfare systems make chronic unemployment far too attractive an option for a certain group in society.