4.4.2 Flashcards
what are the main causes of market failure in the financial sector?
- asymetric information
- externlaities
- moral hazard
- speculation and market bubbles
- market rigging
define speculative bubble
when market price of a financial asset is above what it is truley valued at
driven by herd behaviour, eg: crytocurrency/ dot com bubble
what are the 5 stages of a financial bubble?
- exitment grow about new product/ technology
- prices boom as demand surges
- more investors join driving price even higher
- some investors sell as they realise prices are out of lines with fundamentals
- panic is herd menatlity means everyone sells and huge fall in prices
define market rigging
Market rigging is illegal manipulation of markets to cheat competition. Examples include:
Price-fixing (e.g., banks colluding to set fake interest rates).
Monopoly abuse (dominant firms overcharging or blocking rivals).
Result: Consumers lose (higher prices, fewer choices), while corrupt players profit. 🚫⚖️
where does asymmetric information exist in financial markets?
eg:
* a borrower (such as a small business) has better information as to whether they can afford to repay a loan, than the lender
define moral hazard
When someone takes reckless risks because they won’t face the full consequences—knowing insurance or the government will bail them out.
define a financial crisis
a shock to financial markets associated with falling asset prices and insolvency amongst debtors, disrupting the market’s capacity to allocate financial capital
