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In: Economics

Subprime Crisis is what kind of market failure from the textbook? what is the role of...

Subprime Crisis is what kind of market failure from the textbook? what is the role of the government at market failure according to the Adman Smith? what the effect of that market failure? Do you think Smith’s case is convincing or applicable in today’s world?

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Expert Solution

Subprime crisis was a whole nation financial crisis which took place between 2007-2010 which led to recession in US . There was huge fall in home prices after the housing bubble and as a result there was mortgage delinquencies and foreclosures..

Adam smith believed that free market is guided by invisible hand and less government intervention will make the market efficient .Market failure is an economic situation where there is improper distribution of goods and services in free market.Adam Smith said that markets produce whatever public demands and in order to earn more money and get rich in the process,all goods produced should be sold.Free markets determine prices by invisible hand and there are no market failures .But government role in granting special privileges to some manufacturers and traders may lead huge monopolies that will destroy free market forces and lead to market failure..

The effect in creation of monopoly as a result of market failure is that price and wage in monopoly is higher than in free market and so the economy fail to work properly and certain problems like corruption and bribery crop up.

Adam smith's invisible hand and theory of market failure is satisfying and has been used for generations to understand market processes and competition


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