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A subsidy on each unit of a good, equal to the external benefits it creates, can correct a positive
externality and bring the market to an efficient output level
(C) Public Goods are goods or services that are difficult for the (private) market to provide; requires
direct involvement of the government
Public Goods versus Private Goods
Mixed goods they share features of both public and private goods: (a) Marketable public
good[4]; and (b) Common resources[5]
[4] an excludable and nonrival good; will require a price of zero
[5] a nonexcludable and rival good; will require a positive price
Tragedy of the commons occur when rivalrous but nonexcludable goods are overused, to the
detriment of all
(D) Asymmetric Information a situation in which one party to a transaction has relevant information
not known by the other party
Types of Asymmetric Information:
Adverse Selection a situation in which asymmetric information about quality eliminates highquality goods from the market
Moral Hazard when someone is protected from paying the full cost of their harmful actions
and acts irresponsibly, making the harmful consequence more likely
Principal-agent Problem when one party (the principal) hires another (agent), who in turn can
pursue goals that conflict with the principals because of asymmetric information
Government Failure a situation in which government falls victim to the same types of problems that
cause market failures in the private company