4.4 - Market Failure in Financial Markets

Question 1

How can market failure occur within financial markets?

Answer 1

Asymmetric Information
Moral Hazard
Market Rigging
Externalities
Speculation
Market Bubbles

Question 2

What is the Moral Hazard?

Answer 2

Economic participant takes increased risk due to external protection from risk

Question 3

What is a market bubble?

Answer 3

Sharp + steep rise in asset prices
Often driven by speculation

Question 4

Which factors often cause a market bubble?

Answer 4

Behavioural factors
Exaggerated price expectations
Low monetary policy IR

Question 5

What is Market Rigging?

Answer 5

Collusive behaviour
Occurs in concentrated markets

Question 6

What is the general incentive behind market rigging?

Answer 6

Cooperation in order to coordinate joint profitability + retain consumers with minimal effort

Question 7

What is speculation?

Answer 7

Future price predictions
Dictates purchasing + selling
May be preemptive

Question 8

What might speculation induce?

Answer 8

Market Bubbles

Question 9

Give 3 examples of externalities produced by financial crises

Answer 9

Taxpayer funds bank bail out
Unemployment
Lost shareholder equity