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Chapter 10: Q.15 (page 283)

Why might more competition in financial markets be a bad idea? Would restrictions on competition be a better idea? Why or why not?

Short Answer

Expert verified

More competition in financial markets be a bad idea, When there is more challenge in financial markets there would be a greater incentive for financial firms to take on greater risk.

Restrictions on competition be a better idea because, restrictions may increase the efficiency of banking institutions ,restrictions would decrease the incentive for risk by financial markets and therefore increase bank profits.

Step by step solution

01

Concept Introduction

A market place where exchnage of funds takes place is known financial amrket.This exchaneg can be through finacial instruments such as derivatives, bonds, and stocks.

02

Explanation

More competition woudl encourage firms to take greater risks. Taking more risks can lead to crash of the financial market and a financial crisis in the economy. So, more competition is a bad idea. Restrictions discourage rosky behavior and improve efficiency of instituions.

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