The argument that problems in credit markets result in a lower level of output,
and perhapst oo much risk-takingr elativet o some ideal situationw here
informationi s freelya vailable,i s frequentlyu sed to justifys ubsidizedc redito r
the establishmento f government-ownebda nksi n areast hat appeart o be poorly
served by the public sector. This argument is a non sequitur and should be
resisted whenever encountered. In thinking about market failure and constrainedP
aretoe fficiency,t he full set of feasibilityc onstraintsf or allocatingr esourcesn
eeds to be consideredI. n this article,m arketf ailurei s taken to mean
the inabilityo f a free markett o bring about a constrainedP areto-efficienat llocation
of credit, in the sense defined above (see Dixit 1987 for a sample formal
analysis).T he rest of the articlee xaminest he implicationso f this concept