Market failure is a term used in economics to refer to situations in which free markets fail to allocate goods, services and other resources in a manner that is socially optimal. This means that goods, services and other resources are not distributed among individuals and businesses in a way that maximizes overall economic welfare.

There are a variety of causes of market failure in different economic scenarios. These causes can be broadly classified into the categories of information externalities, public goods, negative externalities and goods with non-existent or ineffective markets.

Information externalities arise when individuals or businesses are unable to gather all the necessary information required to make an informed decision. This can be due to an asymmetry in available information or a lack of knowledge concerning the availability of goods and services. Public goods are those goods and services that are available to all members of society without the need for individual payment. These goods may not be able to be priced effectively, leading to an under-provisioning of resources. Negative externalities are production costs not borne by the originating business or individual, but instead incurred by other members of society. For instance, environmental pollution is a negative externality as the pollution emitted by a business cannot be attributed to their cost of production. Lastly, non-existent or ineffective markets arise in situations where goods and services are either not traded or not traded effectively. This, in turn, reduces the overall social benefit of trade, leading to an inefficient allocation of resources.

Various solutions exist to address market failure. Private solutions such as free markets and profit or loss incentives can help correct market inefficiencies. Government-imposed solutions such as taxes, subsidies or regulations can also help correct market failures. Additionally, voluntary collective actions such as cooperative organizations can also lead to the efficient allocation of resources.

The economic implications of market failure can be far-reaching and varied. Market failure can lead to inefficient and unsustainable economic developments, reduce economic efficiency, reduce economic output and may even lead to long-term economic stagnation. By understanding the various causes of market failure and taking proactive steps to correct them, governments, businesses and individuals can ensure that resources are adequately and efficiently allocated.