Market failure is a term describing the fact that market fails to attain the optimal or efficient allocation of resources. However, this does not necessarily mean economic failure. Sometimes it is suggested that non-market institutions (such as the production of national security) prove to be more successful in bringing welfare to society than market solutions.
It’s rather rare that a market doesn’t fail. Economists and policy makers only pay attention to market failures that have fiercely negative impact on our economy.
Types of market failures include:
- Imperfect competition or market power: monopoly / monopsony, oligopoly / oligopsony, monopolistic competition, price discrimination, …
- Externalities: public goods, pollution, …
- Imperfect information or information asymmetry
- Transaction cost: cost of search, measure, decision-making, bargaining, communication, regulation, contract enforcements, …