4.2 Market Failure in the Financial Sector Flashcards
(5 cards)
1
Q
Reasons for market failure?
A
1) Asymmetric information
2) Moral Hazard
3) Speculation + bubbles
4) Externalities
2
Q
How does asymmetric information work in the financial sector?
A
When one party has more information when accessing financial services
3
Q
What kind of externalities could exist in the financial sector?
A
- Loss of trust and confidence
- Systemic risk
4
Q
What is moral hazard?
A
When banks take more risks because they feel insured and protected
5
Q
How does speculation affect the financial sector?
A
Sharp rise in asset prices based on:
- herd behaviour
- exaggerated expectations
e.g. 2008 housing crisis
