question archive 1)Distinguish between public goods and common resources
1)Distinguish between public goods and common resources
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1)Distinguish between public goods and common resources. Explain why each of these goods can cause the market to fail.
2)Which of the following are the characteristics of principal-agent conflicts that often exist in a firm? (Note: The entire statement must be true in order to be a correct answer.)
a. Managers do not always operate in the best interest of owners because owners are generally more risk-averse than managers.
b. Managers generally have a shorter time horizon than owners; thus, managers do not fully take into account the future long-run profitability of the firm.
c. Managers do not always operate in the best interest of owners because managers care about the non-cash benefits of their jobs.
d. Firms can usually find solutions that reduce agency costs without increasing the monitoring of incentive costs.
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1)Public goods are neither rival nor excludable while common resources are rival in their consumption but not excludable. An example of a public good is national defense, an example of a common resource is common grazing land or congested roads.
Public goods have the free rider problem though the government can remedy the problem. Although common resources have a free-rider problem, it is not possible to prevent free riders from the use.
2)
Option B
The problem of principal-agent will arise in a firm when mangers have a shorter-time horizon than owners. In other words, the problem of principal-agent in a firm is the result of a shorter vision of managers. Managers generally do not care about long-run profitability due to which problem of principal-agent arises.
