4.4.2

• asymmetric information is when one party has better information than the other
• asymmetric information leads to market failure because decisions are made using imperfect knowledge
• firms may hide details from potential investors to showcase the firm as attractive
• banks and lenders can't always access to credibility oof those that borrow - could lend to someone who won't pay it back
• there may be a lack of transparency is financial institutions have more knowledge than regulators
• externality is a cost or benefit to a third party not involved in the buying, selling or consumption of a product
• one firms failure could cause other firms in the economy (negative externality)
• moral hazard is when one party takes excessive risks because they don't deal with the full consequences of their actions - because someone else will absorb that cost
• some large firms may take excessive risks because they believe the government will have to bail them out to avoid financial collapse
• if banks know they are protected - will invest in high risk assets
• managers and traders may take big risks to boost short term profits to earn a large bonus
• leverage deal - borrowing to amplify the end outcome of a deal