Market bubbles can distort market equilibrium from "summary" of Business Cycles and Equilibrium by Fischer Black
Market bubbles are a peculiar phenomenon that can disrupt the natural balance of financial markets. These bubbles occur when the prices of certain assets become inflated beyond their intrinsic value, driven by speculation and irrational exuberance. As a result, the market equilibrium is distorted, as prices no longer reflect the true fundamentals of supply and demand. This distortion can have far-reaching consequences for the economy as a whole, leading to misallocation of resources and increased volatility. During a market bubble, investors may become overly optimistic about the future prospects of certain assets, leading them to bid up prices to unsustainable levels. This can create a feedback loop, where rising prices attract more investors...
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