public goods

three characteristics of a public good

non rivalrous/ diminishable

non excludable

non rejectable

non rivalrous meaning

when a pure public good is consumed by one individual, the stock available for others does not decrease

non excludable

when a public good is supplied it is impossible to prevent others from deriving a benefit

non rejectable meaning

consumers can’t opt out of benefitting from a public good

free rider problem

situation where individuals enjoy a private benefit from a good or service without paying for it leading to under provision or over use of that good

principal agent problem

occurs when a person or entity (the "agent") makes decisions on behalf of another (the "principal") but has different incentives, leading to conflicts of interest

symmetric information

exists where buyers and sellers have access to the same information

asymmetric information

exists where buyers and sellers have different amount of information

how do shareholders -principals- create asymmetrical knowledge with managers - agents

principals delegate responsibilityfor decision making to managers

creates situation of asymmetrical knowledge

managers know more than shareholders

possibility of inefficiencies when shareholders and managers have different objectives