Market failure happens when a market does not allocate resources efficiently. It is not a moral judgment. It is a technical term. Markets can fail in several ways: monopolies restrict output, externalities impose costs on others, public goods go underprovided, and information is asymmetric.

The classic example is pollution. A factory that dumps waste into a river does not pay for the damage. The market price of its product is too low because it excludes the environmental cost. The result is overproduction and a degraded river.

Governments intervene to correct failures. They regulate monopolies, tax pollution, provide public goods, and require disclosure. These interventions can fail too. Regulation can be captured by industry. Taxes can be poorly designed. The choice is rarely between a perfect market and a perfect government. It is between imperfect alternatives.

Common types

• Externalities
• Public goods
• Monopoly power
• Information asymmetry
• Common resource depletion