Public Good Qualityoffinancialstabilityand Financialmarketfailures

An economy can only perform effectively, when there is a stable environment. Stability plays a critical role in raising social welfare, providing an environment for effective allocation of resources in an economy. Financial globalization, particularly liberalization of short-term capital flows, has given rise to both crises occurring more often and helping people to understand the importance of financial stability. Stability possesses two basic properties of public goods, non-rivalry and non-excludability in consumption. However, there would not be any demand in the markets for stability exactly for this reason and that makes instability easier to develop. Instability needs to be seen as a “public bad†since it causes heavy social and economic costs. Financial markets are critically important for economic stability, but they suffer serious asymmetric information problems that lead to problems of adverse selection, moral hazard and multiple equilibrium. The negative effects of asymmetric information problems are more intense in financial markets than other markets. Securities, equities and so on are exchanged in this market according to future return expectations and during this process behaviours of other market participants are critically important. Exactly in this point, a collective action problem that may trigger formation of a crisis appears. From the starting point that nowadays crises may strike even economies with strong fundamentals, this study focuses on the role of financial market failures in the process of a crisis development in aself-fulfilling manner.