Market failure and public need: responding where the public sector does not go

This paper examines serving an area of key public need which the public sector has opted to not directly serve.  Rather the public sector only provides a limited safety net which fails to reach most of those in need.... [ view full abstract ]

This paper examines serving an area of key public need which the public sector has opted to not directly serve.  Rather the public sector only provides a limited safety net which fails to reach most of those in need. Arguably the private sector has failed to appropriately meet the need and the paper explores a social enterprise response.

There are few more stark examples of market failure than the poverty premium, whereby people in poverty pay more for services such as energy or finance than their wealthier counterparts. Kempson & Whyley, 2000).  Whereas traditionally the public sector might address this failing, in the case of finance for household essentials (washing machines, carpets, beds) it has fallen to others to step in. (Collard,& Kempson 2005 , Gibbons, et al 2011)

The responsibility of the public sector for core services such as water and power has long moved away from actual provision but the responsibility for ensuring that the most vulnerable in society are not excluded from essential services. (Preston et al 2014). There is an implicit requirement that key appliances such as cookers, fridges and washing machines are available.  These have been provided for those most in need through funding from some government discretionary funds or from charitable sources. 

For the majority of low income households the option has been the private sector through ‘rent to buy’ at very high rates of interest typically  amounting to several times the purchase cost of the item.

Fair for You commenced trading in 2016; in 18 months this online social enterprise has helped over 7,000 families borrow money at well below the prevailing market rate, despite their customers lacking conventional ‘creditworthiness’. Fair for You’s customers can’t walk into a High Street store with cash, use a conventional credit card or sign a zero finance loan; and yet a £250 washing machine can typically be purchased through Fair for You for £7/week for one year compared to £10/week over three from a rival in this marketplace, saving over £1,000.

Fair for You’s customers report the highest level of customer service in UK finance, a halving of their poverty premium and improved mental health as a result their support. Backed by £6M of loans from social finance institutions Fair for You was voted Customer Credit Champion, 2017.

References

Collard, S., & Kempson, E. (2005). Affordable credit: The way forward. Policy Press.

Gibbons, D., Vaid, L., & Gardiner, L. (2011). Can consumer credit be affordable to households on low incomes. London. Centre for Responsible Credit and Friends Provident Foundation.

Kempson, E., & Whyley, C. (2000). Extortionate Credit in the UK. London: Department of Trade and Industry (quoted in Financial Services Authority In or Out.

Preston, I., White, V., Katharine, B., & Hirsh, D. (2014). Fuel Poverty. A Rapid Evidence Assessment for the Joseph Rowntree Foundation. Centre for Sustainable Energy. Reg charity, 298740.