Incentive problem


When you prevent competition, you actually end up rewarding the losers and punishing the winners. The great example of this, of course, are a government bailouts. What bailouts do, is allow failed entrepreneurs to keep using scarce resources, which would otherwise be going to the entrepreneurs, who have actually demonstrated the ability to produce things people want. So, bailouts create a tremendous waste of resources. But they also encourage waste in the future, because of the incentive problem: because entrepreneurs believe that if they fail, they would just be rescued — they behave more recklessly and they are encouraged to make more bad decisions in the future. Matt McCaffrey.