When one party knows more than another in a transaction
Examples in Financial Crisis- bankers knew much more about their adjustable rate subprime mortgages than the people they were selling them to and knew more about banking than the financial regulators who were meant to be monitoring their behaviour
Speculation and Market Bubbles
2008 Financial Crisis- house prices were rising so banks sold subprime mortgages causing a housing bubble, which eventually “bursted“ and led to market failure
Negative Externalities
Costs that affect third parties outside the price mechanism
2008 Financial Crisis- less lending, job losses, decrease in AD and reduce in real GDP, unemployment
Moral Hazard
Someone else pays consequences for risky behaviour
2008 Financial Crisis- US spent about $700 billion of taxpayers’ money to stop banks from going bankrupt
Market Rigging
Firms unfairly try to control prices which distorts the price mechanism
