Market Failure
A situation where free markets fail to allocate resources efficiently, justifying possible government intervention.
What is Market Failure?
Market failure occurs when the unregulated interaction of buyers and sellers fails to maximize social welfare — producing too much or too little of a good relative to the socially optimal level. The four primary causes are externalities (costs or benefits borne by third parties), public goods (non-excludable, non-rival goods that private markets undersupply), information asymmetry (one party knowing significantly more than the other, as in insurance or used-car markets), and market power (monopolies that restrict output and raise prices). Market failures are the economic justification for government intervention through taxation, subsidies, regulation, and direct provision of goods and services.
Example
Health insurance markets are plagued by adverse selection — a form of information asymmetry. Individuals know their own health status better than insurers. The sickest people are most eager to buy insurance; healthier people opt out if premiums feel too high. This drives up average costs, pushing out more healthy buyers, which drives costs higher still — a "death spiral." Without government mandates or subsidies, private markets may fail to provide universal coverage.
Source: Investopedia — Market Failure