This paper identifies two types of market failures. The first concerns a coordination problem associated with panics. The problem in analysing this type of market failure from a policy perspective is that there is no widely accepted method for selecting equilibria. The second market failure...

Abstract Proponents of liberal economic policies in the financial market often refer to the moral and economic authority of Adam Smith, the founder of economics as a science, to add weight to their recommendations. They think, they can do so, because Adam Smith is in these circles considered a...