Chapter 5: Where credit is due
Public policies for credit allocation are intended to alter the patterns of lending that would result if financial decisions were guided solely by the ‘free play’ of market forces. These policies include both lending by public sector institutions, often at below-market rates, and the use of regulations and incentives to influence the behavior of private-sector lenders. The primary rationale for these interventions is to redress market failures caused by public goods and externalities, including those related to economies of scale and long-term time horizons. Another important set of market failures are those that result in socially undesirable environmental degradation, but credit allocation rarely has been targeted to redressing market failures of this type. This chapter explores the potential for using credit allocation as a tool to advance environmental goals. First, we discuss the need for public policies to advance environmental goals domestically and internationally. We then describe some of the most important techniques for credit allocation that are used in the US economy. Finally, we explore several ways in which credit allocation could be harnessed for environmental goals, both domestically and internationally.
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