MARKET FAILURES IN INFORMATION
Our analysis up to now has assumed that investors and consumers are well informed about the risks,they face and that speculative’ and insurance markets function efficiently. In reality, markets involving risk and uncertainty are plagued by market failures. Two of the major failures are adverse selection and moral hazard.
When these are present, markets at give the wrong signals, incentives may get distorted, and, sometimes markets may simply not exist. Because of market failures, governments may decide to step in and offer social insurance.
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