words, if a third party is affected, possibly negatively, by the decision of the
other two-a Pareto improvemenits clearlyn ot guaranteed,e ven if the two
principals are made better off. It is well known that markets operate inefficiently
if there are externalities( see Greenwalda nd Stiglitz 1986f or a general
discussion), and specifict ypes of externalitiesm ay particularlya fflict credit
markets.O ne importantr ole for governmentp olicy to improvet he workingo f
credit marketsi s to deal impartiallyw ith externalityp roblems.