Explain clearly the negative externalities in banking using your case studies to support your answer.

Expert Solution

This question is based on the case study of the bank of England. Some of the externalities are:

Innovation

Finance and economic development

Economies of scale

Systematic risk in larger economy

Explanation:

1. Innovation : investors do not accept any new innovation or plan of investment easily. However one of the main components of any business is innovation.

2.Finance and economic development: financial system has a direct impact on the economic development of a country and vice - versa. The financial system is therfore effectes by a lot of factors such as- foreign investment and foreign banks.

3. Economies of scale: demand function, effect of one bank on others banks cost and skilled and unskilled labour. All these factors are a part of economies of scale that externally effect the working of a bank.

4. Systematic risk in larger economy:

The issue of run- out of one bank may cause problems to other banks working in the same economy.

jeff jeffy answered 3 days ago

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