What Types Of Market Failure Are In Financial Market

Question 1

Asymmetric information

Answer 1

• in these markets, the borrower has much better information about his financial start than the lender

Question 2

Externalities

Answer 2

• costs of borne by other firms, individuals and government but not financial markets themselves

Question 3

Moral hazard

Answer 3

• occurs when an economic agent makes decisions knowing there are potential adverse risks
• borrowing money, knowing there are no consequences

Question 4

Speculation and market bubbles

Answer 4

• most trading is speculation - it’s whether or not the market is going to perform well
• market bubbles occurs when the price of an asset is driven to an excessive high and then collapses

Question 5

Market rigging

Answer 5

• group individuals or institutions collude to fix prices or exchange information that will lead to gain for themselves at the expense of other participants in the market