Market Failure

Market failure occurs when the free market, left to itself, fails to allocate resources efficiently, so that community surplus is not maximized. The causes examined in IB economics include externalities, public goods, common pool resources, and asymmetric information. In each case the private incentives of individuals diverge from the interests of society.

Marginal analysis and externalities

Externalities are spillover effects of production or consumption that affect third parties who are not part of the transaction. Analyzing them requires four curves. Marginal private cost (MPC) and marginal private benefit (MPB) reflect the costs and benefits to the decision-makers, while marginal social cost (MSC) and marginal social benefit (MSB) add in the effects on third parties. The socially effic