Market failure occurs when a free market fails to distribute resources efficiently, leading to outcomes that do not achieve the best possible results for society.

Key reasons for market failure include:

• Externalities: Situations where production or consumption affects third parties. Negative externalities (like pollution) lead to over-production, while positive externalities (like education) lead to under-production.
• Public Goods: Goods that are non-excludable and non-rivalrous. Because of the "free rider problem," private companies often cannot make a profit, leading to the goods not being provided at all.
• Imperfect Information: When buyers or sellers lack the necessary information to make good decisions. This often involves asymmetric information, where one party knows more than the other.
• Market Dominance: When companies (such as monopolies) have too much control. They may keep prices high and limit supply, which prevents an efficient market.
• Factor Immobility: When workers or resources cannot easily move to where they are most needed. This can be geographical (location-based) or occupational (skill-based).
• Common Access Resources: Shared resources that are not owned by anyone, leading to the "tragedy of the commons," where people overuse and deplete natural resources like fish stocks or forests.