POL-2.B—Explain (using graphs where appropriate) how private incentives can lead to actions by rational agents that are socially…

Explain (using graphs where appropriate) how private incentives can lead to actions by rational agents that are socially undesirable (inefficient) market outcomes.

• Rational agents can pursue private actions to exploit or exercise market characteristics known as market power.
• Rational agents make optimal decisions by equating private marginal benefits and private marginal costs that can result in market inefficiencies.
• Policymakers use cost-benefit analysis to evaluate different actions to reduce or eliminate market inefficiencies.
• Market inefficiencies can be eliminated by designing policies that equate marginal social benefit with marginal social cost.
• Enduring understanding POL-2: Perfectly competitive markets allocate resources efficiently, but imperfect competition often results in market inefficiencies.