Lesson 47-Market Failure in the Financial Sector

Question 1

When does market failure occur and what is it a justification for?

Answer 1

.When it is not economically efficient or allocates its resources efficiently
.Market failure is a justification for government intervention

Question 2

How can market failure occur with Asymmetric information?

Answer 2

.This is when one individual or party in the transaction knows more than the other, then uses it as an advantage against the other to exploit them

Question 3

When does a moral hazard exist?

Answer 3

A moral hazard exists when an individual or organisation takes more risks because they know they are covered by insurance

Question 4

What is a speculative bubble?

Answer 4

A speculative bubble is a sharp rise in the price of assets such as stocks and shares, commodities or crypto-currencies

Question 5

Give an example of a barrier to entry in commercial banking

Answer 5

.Regulatory barriers
.Natural or intrinsic barriers to entry such as the costs of entering into the market
.Strategic advantages of larger banks
.First mover advantages and brand loyalty to other banks

Question 6

What is a systemic risk?

Answer 6

Systemic risk is the possibility that an event at the micro level of an individual bank could then trigger a collapse of of a whole industry or economy