Information Asymmetry
When one party in a financial transaction has more or better information than the other
Understanding Market Failure in Finance
A comprehensive analysis of market inefficiencies, their impacts, and solutions in the financial sector
What is Market Failure?
Market failure occurs when the allocation of goods and services in a free market is not efficient, leading to a net social welfare loss. In financial markets, these failures can manifest through:
- Information asymmetry between market participants
- Externalities affecting third parties
- Market power concentration
- Public goods and free-rider problems
Types of Market Failure
Externalities
Costs or benefits affecting third parties not directly involved in the market transaction
Market Power
When certain participants can influence market prices
Public Goods
Financial services or products that are non-rivalrous and non-excludable