How is market failure defined?

Market failure is defined as a scenario where the allocation of goods and services is inefficient. This concept highlights situations in which the free market, when left to its own devices, does not lead to an optimal distribution of resources. In such cases, the market may fail to allocate resources in a manner that maximizes overall welfare or utility for society.

Market failures can arise from various factors, including externalities (where the effects of a transaction impact third parties), public goods (which are non-excludable and non-rivalrous), information asymmetries (where one party has more or better information than the other), and monopolies or oligopolies that distort competitive outcomes. When these issues exist, the market fails to produce outcomes that are deemed efficient or equitable.

In contrast, the other options presented do not encapsulate the essence of market failure as comprehensively. While they touch upon aspects of market dynamics, none describe the scenario where resources are misallocated, leading to inefficiencies in the market system. This distinction is crucial for understanding economic theories concerning resource distribution and governmental interventions.