What does market failure result in?

Market failure occurs when the allocation of goods and services by a free market is not efficient. This inefficiency typically leads to a situation where resources are not allocated in a way that maximizes total welfare or utility in the economy.

In the case of market failure, the market may produce too much or too little of certain goods and services compared to the socially optimal level. This can happen due to several reasons such as externalities, public goods, information asymmetry, or monopolistic practices. For example, when negative externalities like pollution occur, producers may not bear the full costs of their actions, leading to overproduction of harmful goods, which creates inefficiencies in resource allocation.

Understanding the implications of market failure is crucial for policymakers, as it often necessitates some form of intervention to restore efficiency and improve economic outcomes.