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Understanding Market Failure in the 2007-08 Crisis, No. 14-12

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Understanding Market Failure in the 2007-08 Crisis, No. 14-12

DATE: December 2014

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ABSTRACT: Did market failures cause the 2007-08 financial crisis? While economists have made substantial progress exploring this question, the answer remains unclear. The answer is important because financial regulation that does not address a specific market failure risks causing new inefficiencies and unintended consequences in the financial system and broader economy. To demonstrate how economic theory can be used to identify market failures and guide policy, this Economic Brief discusses a common market failure called a "pecuniary externality" and demonstrates the pitfalls of applying regulations in situations where the precise sources of market failures are not well-understood.

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Grochulski, Borys , Morrison, Wendy and Federal Reserve Bank of Richmond. "Understanding Market Failure in the 2007-08 Crisis, No. 14-12," Economic Brief (December 2014). https://fraser.stlouisfed.org/title/6034/item/583931, accessed on May 18, 2022.

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