Argument and market failure – Payday loan rule

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PAYDAY LOAN RULE Name Instructor Course Date Payday Loan Rule Market failure is a term used to refer to a situation where there is a breakdown in an organization production or efficient allocation of desired goods (Cunningham, 2011). The imperfection of the price system or frail institutional arrangements could be the main cause of his phenomenon. A payday loan is an unsecured financial product targeting the retail segment that allows customers to borrow small amounts of money averaging $300 in the short-term by pledging as collateral a check bearing the date of the subsequent payday. There is thus quick access to cash attracting millions of clients who end up repaying the loans in a lump sum and practicing continuous borrowing. A scenario necessitated by the conditional availability of a third of the average clients pay to facilitate full loan repayment hence creating a gap in financing of everyday life (PEW Charitable Trusts, 2013). It is significant to note that both the principal amount in addition to interest is due on the same date. Plugging this gap necessitates additional borrowing. Consequently, those who have taken to this product end up struggling financially, making it a failed product. Economists who view the payday loan rule as a market failure term as ‘predatory’ the increased interest rates charged since they take advantage of the borrower’s behavior. They point out that the bit-by-bit repayment mode renders their repayment difficult as a result plunging the customers into a ‘debt spiral’ and ultimately personal bankruptcy (Beddows and McAteer, 2014). The incurred cost is a derivative of cost added to pricing methodology. Inability to

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