What is market failure?

Market failure refers to a condition where the allocation of goods and services by a free market is not efficient, leading to a net social welfare loss. This often occurs when the market fails to account for certain externalities, such as environmental impacts or public goods, which can result in resources being overused or underprovided.

In essence, when market forces—through supply and demand—cannot adequately allocate resources, this results in inefficiencies that can hinder economic output and socal welfare. Factors contributing to market failure can include monopolies, public goods, externalities, and information asymmetries.

Understanding this concept is crucial for evaluating how different market structures and governmental interventions can impact economic efficiency. In contrast, other options describe scenarios unrelated to the essence of market inefficiencies or mismanagement, emphasizing the importance of accurately identifying the fundamental aspects of market failure.