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Explain who the stakeholders are.

Who wins and who loses?

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Discuss any market failures, unintended consequences, or information imperfections relevant to your topic.

Explain how these factors challenge or modify the predictions of the standard equilibrium model.

Discuss potential unintended consequences, externalities, market power, or reasons the standard market equilibrium model may not be applicable.

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Summarize the positive (descriptive) and normative (value-based) analysis of the policy or situation.

Present a reasoned conclusion on the policy's effectiveness, considering efficiency, equity, winners and losers, etc.

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Identify and explain relevant economic concepts.

Describe how the topic ties into class economic principles.

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Use a graphic to visually demonstrate the standard equilibrium model's application to your topic.

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Present a comparative analysis of the current situation with a past policy or scenario.

Use real-world examples or expert viewpoints to provide a broader perspective.

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BNPL is modeled on consumer credit, behavioral economics, and especially involve current bias, information asymmetry, and regulatory gaps in shaping how a consumer perceives market dynamics. Financial vulnerability is accompanied by a transformed consumer purchasing behavior.

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Introduce the chosen topic.

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The topic discusses the emergence and consequences of buy now, pay later (BNPL) services, which come under modern financial models that allow a consumer to postpone payments or to pay in installments without interest.

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Since the BNPL ideas are inextricably bound by the theory of supply and demand, especially how consumer access to credit pushes demand on the demand curve to the right, hence a new consumption equilibrium with potential price increase and decrease depending on supply elasticity is bound to be created. The model also highlights forms of market failure, including externalities (for instance, debt burden), imperfect information, and bounded selfishness.

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In stark contrast to credit cards, which build credit through thorough credit checks, BNPL puts little to no consideration to such checks thereby prompting debt accumulation. While credit cards have a long-standing practice of credit reporting and minimum payment requirements, BNPL on the other hand means walking a fine line in debt stacking with very little regulation. Whereas with past credit card regulation, such as the CARD Act in the U.S., there existed some consumer protection against penalties, with BNPL there is not a formalized standard for such excessive penalties.

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The usage of Klarna in the United States increases by 50% during 2023, whereas in early 2024, it is slapped with a fine of $50 million, thus showcasing the rising adoption of such instruments and concerns regarding tightening compliance. The United Kingdom's C. A. Bureau reports that BNPL users dip into 42% of their funds for repaying BNPL debts, whereas credit card users are reported to be at only 18%. This highlights a pattern of concentration risk among financially vulnerable users.

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The "Buy Now, Pay Later" (BNPL) mechanism exhibits several market failures. First, many consumers lack proper knowledge to assess repayment schedules or hidden fees and, thus, tend to overspend because of information asymmetry. Secondly, behavioral biases like present bias usually encourage consumers to consider short-term utility by overlooking long-term debt.

Negatively, the BNPL scheme gives rise to negative externalities, such as developing debt burdens across the society. Some platforms might be exercising market power, and consumer protection could be weak due to lack of regulations.

These issues contest significant assumptions underlying the standard equilibrium model-such as complete information, rational actors, and competitive markets-also proving that real-world markets are much more complicated and thus might require corrective actions through policy.

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Consumers, fintech companies, conservative lenders, and regulators are all stakeholders in the BNPL market.

The winners include the fintechs (like Afterpay or Klarna) because they get more and more users making money for them. The retailers are the other winners in the scenario because they increase their sales margins and decrease cart abandonments. In this scenario, some consumers emerge as winners, especially the ones who handle payments nicely and enjoy short-term interest-free credit.

The losers include consumers due to late fees, late payment, accruing debts, and damages on credit ratings for those who might begin late payments or misunderstand the terms. Traditional lenders may be losing market shares by now. Increased personal debt and financial instability may also have adverse impacts on society at large.

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Bringing credit within reach at the same time inciting consumer spending, especially by younger consumers, the BNPL scheme has concern mostly regarding the default rates that have been enriched with poor and at times confusing disclosure of such schemes that financially endanger consumers and expose them to long-term possibilities of debt cycles.

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Ethically, it holds that BNPL does take advantage of those unprotected consumers who would not conscientious consent into such agreements. A fair system must put action to pre-empt good behavior while not encouraging bad borrowing behavior or hidden costs.

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Although this BNPL service has increased market efficiency by unlocking temporary liquidity constraints, justice and transparency are some of the questions raised about this service. Most stakeholder outcomes would, however, be enhanced by having consumer protection and a level playing field. Some options available as regulations are better disclosures, capping late fees, and compulsory credit checks. That is, the impacts of policy on the ground will differ on whether a balance between innovation and growth is achieved without harming consumer welfare.