Agent failures: A theory of internalities

Market failures, such as market power, externalities and imperfect information, have played a major role in economic theory. This article studies internalities, as others have done in the past, as agent failures. To do so, it considers economic agents with imperfect foresight, that face internal conflicts between say, rationality and impulsivity; consciousness and unconsciousness, short run welfare and long run welfare; between members of the board; or between members of the Government cabinet or a majority coalition in Congress. This allows to identify the biases in judgment that lead to the misallocation of resources and the loss of welfare, that have been studied for example in behavioral economics, and that are defined here as internalities. Such approach helps to explain irrational or unexpected behaviors, expanding the use of the tools of conventional economic theory; and understand better and hopefully improve, personal, social and public solutions, to this important source of economic inefficiencies.