When the free market fails to allocate resources to the best interests of society, so there is an inefficient allocation of scarce resources
Economic and social welfare is not maximised where there is market failure
Types of market failure
Externalities
The under-provision of public goods
Information gaps
Externality
The cost or benefit a third party receives from an economic transaction outside of the market mechanism. In other words, it is the spillover effect of the production or consumption of a good or service.
Public goods
Non-excludable and non-rival, and they are underprovided in a free market because of the free-rider problem
Information gaps
Consumers and producers have imperfect information when making economic decisions, leading to a misallocation of resources
