In the financial sector, systemic risk is a major source of market failure. Which of the following is the most accurate example of market failure arising specifically from a negative externality?
A major investment bank engaging in highly leveraged proprietary trading, where the private cost of default is significantly lower than the wider economic cost of a collapse in the interbank lending market
An insurance firm charging higher premiums to younger drivers because statistical data shows they are more likely to be involved in accidents
A borrower hiding details of their outstanding debts when applying for a peer-to-peer loan, leaving the lenders unable to accurately assess default risk
The central bank providing emergency liquidity support to solvent but temporarily illiquid commercial banks during a sudden panic in wholesale funding markets
9 exam-style questions on Edexcel A A Level Economics 4.4.2 Market failure in the financial sector. Each one has a worked solution and a mark scheme showing where the marks go.