The provision of loan guarantees can improve economic efficiency when:

Question

Quizplus · Accepted Answer

Loan guarantees can improve economic efficiency when the project being supported has significant external benefits, meaning that the project's benefits extend beyond the individuals directly involved in the project. In these cases, the private market may not fully take into account these external benefits when making investment decisions, and loan guarantees can help to ensure that these projects receive the necessary funding to be completed. The other choices are not necessarily situations where loan guarantees would improve economic efficiency. Moral hazard problems, where investors take on excessive risk because they know they are protected by a guarantee, could actually lead to less efficient allocation of resources. Regulatory capture and private investors providing too much funding are not directly related to the economic efficiency of the project itself.

The Provision of Loan Guarantees Can Improve Economic Efficiency When