I know this isint like changing the resolution but you can make everything smaller! (Text, Icons, Dock, Everything!) that will simulate to a point a resolution increase.
Buy another powerbook and duct tape it to the side of your powerbook.
As for your second question...what causes the limitation. Are you familiar with the basic way an LCD screen works? The number of pixels is fixed. This is true of every LCD from every manufacturer used on every kind of device, as far as I know. You can display lower resolutions than the number of hardware pixels, and it will map these resolutions onto the screen, but you can't go higher.
So the only way for a powerbook to have a higher internal LCD resolution than it has now is to put a different screen in it.
This is also true for non-Apple notebook computers and desktop LCD screens.
If there was a hack to increase the iBook's resolution, I think Apple would be singing and dancing about the fact, as it would be a major selling point! Like the others have said, the max resolution is fixed by the number of LCD pixels. Certainly wishful thinking though.
I know this isint like changing the resolution but you can make everything smaller! (Text, Icons, Dock, Everything!) that will simulate to a point a resolution increase.