Final answer:
Risks that affect only a single firm are known as specific risks. These risks are contrasted with systematic risks which impact the broader market and cannot be diversified away. Imperfect information in financial and insurance markets creates difficulties in assessing risks and allocating resources effectively.
Step-by-step explanation:
Risks that affect only a single firm are called specific risks. These are different from systematic risks, which are economic risks that affect a large number of assets or the entire market and over which individuals have very little control. Specific risks, also known as unsystematic risks, can be diversified away by holding a varied portfolio of assets, unlike systematic risks which are inherent to the entire market or economy.
Imperfect information plays a crucial role in financial and insurance markets, leading to challenges in the allocation of financial capital and insurance coverage. For instance, a firm's insiders often know more about its future profit potential than outside investors, which can lead to a disparity in the information available to different parties. Similarly, insurance companies face difficulties in assessing the risk levels of clients due to imperfect information.