When the government provides loan guarantees and in effect "socializes losses and privatizes gains" of a project or firm, it can lead to a:

Question

Quizplus · Accepted Answer

When the government provides loan guarantees and shields investors from the risk of losses, it can create a moral hazard problem among investors. This means that investors may take on more risk than they would otherwise because they know they will not bear the full cost of any losses. This can lead to reckless behavior and increased likelihood of failure, ultimately resulting in a loss for taxpayers who end up bailing out the failed project or firm.

When the Government Provides Loan Guarantees and in Effect "Socializes