The Pervasiveness and Consequences of Market Failure in UK Sub-Prime Credit Markets and Challenges for Social Policy

Market failure, around credit provision, typically centres on adverse selection and moral hazard. We utilise a Diverse Economies Framework to distinguish between different types of lender (mainstream, alternative, and non-market) and neoclassical economic theory as an analytic framework to introduce three additional forms of market failure – diseconomies of small scale, externalities, and excess demand and oversupply. This suggests market failure in the UK sub-prime consumer credit market is more comprehensive than previously recognised, increases the argument for government intervention and points to four policy responses – public subsidies, patient capital, regulation, and taxation – to complement and supplement market responses. Without support, not-for-profit sub-prime lenders, such as Community Development Finance Institutions, will continue in their struggle to survive, further exposing an already-vulnerable group of borrowers to even greater debt and associated worse health and wellbeing.