Market failure happens when the free market is unable to distribute resources in the best possible way, resulting in an outcome that does not provide the maximum possible benefit to society.

When this occurs, resources are either used too much or too little for certain goods and services, which creates a deadweight welfare loss.

Common types of market failure include:

• Public goods: Goods that are non-excludable and non-rival, such as national defense or street lighting. Because people can use them without paying, private businesses often do not provide them.
• Merit goods: Goods that people consume too little of because they do not realize their long-term benefits, such as education or vaccinations.
• Demerit goods: Goods that people consume too much of because they underestimate the harm they cause, such as cigarettes or alcohol.
• Externalities: Costs or benefits that affect people who were not involved in the transaction. Positive externalities are under-produced, while negative ones are over-produced.
• Market dominance: When a single company or group has too much power, they may increase prices and lower production, which is inefficient.
• Factor immobility: When workers or machinery cannot easily move to where they are needed most.
• Information gaps: When one party in a deal has more or better information than the other, which prevents fair and efficient trade.

Main consequences of market failure:

• Loss of overall welfare for society.
• Inefficient supply of important goods like healthcare.
• Higher pollution or consumption of harmful products.
• Unequal distribution of resources.