If the credit market is close to being a competitive market, an interest rate ceiling imposed by usury laws will bring misallocations of resources.

Question

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If the credit market is competitive, interest rates reflect the market equilibrium and an interest rate ceiling will prevent lenders from charging the appropriate interest rate, resulting in a misallocation of resources. This is because lenders will have lower profits and be less incentivized to lend, while borrowers will have less access to credit.

If the Credit Market Is Close to Being a Competitive