Market Failure in the Financial Sector

Question 1

What are ways the financial market can fail?

Answer 1

Asymmetric information
Externalities
Moral hazard
Speculation and market bubbles
Market rigging

Question 2

How does asymmetric information cause financial market failure?

Answer 2

Many financial markets are complex and difficult for consumers to understand
The seller may have a significant information advantage over the buyer

Question 3

How does moral hazard cause financial market failure?

Answer 3

A moral hazard is a situation where there is a risk that the borrower does things that the lender might not find desirable because it makes the borrower less likely to pay back the loan
E.g if a house is insured, a borrower might be less careful because they
know any damage caused will be paid for by someone else.