Economic bubble

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An economic bubble occurs when speculation in a good causes the price to increase, thus producing more speculation. The price of the good then reaches absurd levels and the bubble is usually followed by a sudden drop in prices, known as a crash.

Economic bubbles are generally considered to be bad things because they cause misallocation of resources into non-productive uses. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s and Japan in the 1990s.

When the bubble occurs in equity markets, it is called a stock market bubble. It is usually very difficult to differentiate a stock market bubble from an ordinary bull market until it is over.

Examples of economic bubbles include:

• South Sea Bubble
• Tulipomania
• Real estate is frequently a good example of economic bubbles:
  • the Florida swampland real estate bubble
  • Japanese real estate bubble boom
• Internet bubble

Other goods which have produced bubbles include beanie babies and postage stamps.