What is market failure? Why does it happen?

Market failure is a situation in which free markets fail to allocate resources efficiently, resulting in a misallocation of goods and services.

It occurs when there is an inefficient allocation of resources due to a lack of competition, a lack of information, or an inability to accurately price goods and services.

An example of market failure is the presence of externalities, which are costs or benefits incurred by third parties as a result of a market transaction.

Another example of market failure is the presence of public goods, which create a positive externality, but cannot be provided efficiently by the market.

Additionally, market failure can occur as a result of market power, which occurs when a single firm or a small group of firms dominate the market and are able to set prices above the competitive level.

Monopoly power is another example of market failure, in which a single firm has control over the entire market.

Market failure can also occur due to the presence of imperfect information, which can lead to misallocation of resources or inaccurate pricing.

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