Explain the impact of incentives on the behaviour of economic agents and resource allocation.

Each economic agent has certain objectives, and they respond to incentives in order to maximise these goals. Incentives refer to potential monetary gains (e.g. profit incentives), or utility gains (e.g. from consumption of a good for a household), and when incentives are given properly, resources are allocated correctly and a market equilibrium is achieved.If the marginal benefit of performing an action is greater than the marginal cost of performing an action, the economic agent will do it. For example, due to the law of diminishing marginal returns, the marginal benefit of consuming a good will reduce, thus the incentive for increasing consumption reduces. An increase in the cost of a good will also reduce the incentive to consume it, as the difference between marginal benefit and marginal cost reduces.