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Markets are not perfect, and they cannot solve every problem. But they are extremely powerful and when governments reshape them to serve a public purpose, they can have a tremendous impact.

--David Osborne, "Ten Ways to Turn D.C. Around,"
The Washington Post Magazine, 12/19/90

Governments have two primary methods for solving problems.

  • Require or prohibit specific behavior.
  • Create economic incentives to encourage or discourage specific behavior.

Although requirements & prohibitions are often necessary, they have some drawbacks:

  • People must know that these requirements and prohibitions exist;
  • People must read and understand them;
  • People must comply with them; and
  • Government must hire staff to monitor and enforce compliance.

Economic incentives have the following advantages:

  • If economic incentives are aligned with public policy objectives, people's desire to save money and avoid taxes and fees will enlist the private sector’s energy around the clock to effectuate a public purpose;
  • Effectiveness is not diminished if people do not understand or agree with the underlying policy; and
  • Because people are almost always motivated to save money, economic incentives are self-enforcing and rarely require any separate enforcement effort.