IB Diploma Programme Economics HL, Unit 2 Microeconomics (first assessment 2022). This topic covers syllabus sections 2.8 (market failure — externalities and common pool or common access resources), 2.9 (public goods) and 2.12 (the market's inability to achieve equity) in full. The externality model reuses the shared curves in inverse form — demand (marginal private benefit) $P = 70 - Q/2$, supply (marginal private cost) $P = Q/4 - 5$, market equilibrium $(100, 20)$ — with an external cost or benefit of 6 per unit, so every welfare area cross-checks against the earlier drives.

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An externality 外部性 is a cost or benefit falling on a THIRD PARTY not involved in the transaction (2.8). Negative production externalities — pollution, congestion — put the marginal social cost 边际社会成本 MSC above MPC; positive consumption externalities — vaccination, education — put the marginal social benefit 边际社会效益 MSB above MPB. The market trades at $(100, 20)$ where MPB $=$ MPC; with an external cost of 6 per unit, MSC $=$ MPC $+ 6$ crosses MSB at $(92, 24)$ — the market OVER-produces by 8 units and the deadweight welfare loss is $\tfrac12 \times 8 \times 6 = 24$ per day. With an external benefit of 6 on consumption, the social optimum moves to $(108, 16)$ — the market UNDER-consumes by 8, again sacrificing 24 of welfare. HL diagrams label MPB/MSB and MPC/MSC and shade the welfare-loss triangle between the curves over the gap.

Policy responses follow the diagnosis: a Pigouvian TAX equal to the marginal external cost (6 here) shifts MPC to the social optimum; a SUBSIDY equal to the marginal external benefit does the reverse; regulation caps the quantity; tradable permits fix the total and let the market find the price. Common pool or common access resources 公共资源 (also 2.8) — fisheries, groundwater, the atmosphere — are RIVAL but NON-EXCLUDABLE: each user imposes costs on the others, so without property rights or quotas the resource is over-used (the tragedy of the commons), and sustainability — a Unit-1 key concept — frames the long-run evaluation.

A public good 公共物品 (2.9) is NON-RIVAL (one person's consumption does not reduce another's) and NON-EXCLUDABLE (no one can be stopped from using it): street lighting, national defence, flood control. Non-excludability creates the free-rider problem 搭便车问题 — everyone can benefit without paying, so no private firm can collect revenue, so the market UNDER-provides or does not provide at all. The state provides public goods from taxation, valuing them at society's willingness to pay. The contrast pair: common pool resources are non-excludable but RIVAL (each fish caught is gone); public goods are non-excludable AND non-rival — the two exam cases travel together.

Markets reward scarcity of resources, not need (2.12): the price mechanism answers "for whom?" by willingness and ability to pay, so market outcomes can be efficient yet grossly UNEQUAL — the equity 公平 half of the efficiency-equity key-concept pair. IB measures: the LORENZ CURVE plots cumulative income against cumulative population (from the poorest); the GINI COEFFICIENT — area between the equality line and the Lorenz curve over the whole triangle — runs from 0 (perfect equality) to 1 (one person takes all). Original example: quintile shares $5, 10, 15, 20, 50$ percent give a Lorenz curve through $(20,5), (40,15), (60,30), (80,50)$; the area under it is $3000$ of the $10000$ square, so Gini $= 1 - 2 \times 0.30 = 0.40$. Poverty 贫困 may be ABSOLUTE (basic needs unmet) or RELATIVE (deprivation against the social norm). Responses: progressive taxation, transfer payments, and access to education and health — each weighing equity gains against incentive and efficiency costs, the trade-off every Paper-1 essay must evaluate.

• Externality definition; MSC/MSB with the $(100,20) \to (92,24)$ negative-production and $(108,16)$ positive-consumption optima; welfare loss 24 in each direction (2.8).
• Pigouvian tax and subsidy at the marginal external cost/benefit; regulation; tradable permits (2.8 policy, HL diagrams).
• Common pool or common access resources: rival + non-excludable, tragedy of the commons, sustainability (2.8).
• Public goods: non-rival + non-excludable; the free-rider problem and non-provision; state provision (2.9).
• The market's "for whom" answer and its equity failure; Lorenz curve and Gini with the 0.40 calculation; absolute vs relative poverty; the three redistribution instruments and their trade-offs (2.12).

Boundary notes: HL Paper 1 25-mark essays on market failure want the labelled diagram (MPB/MSB/MPC/MSC, both optima, the shaded triangle), a policy with its mechanism, and evaluation of government failure against the market failure it corrects. The key concepts sustainability, equity, efficiency and intervention frame this whole topic. All worked numbers are original on the shared model.