Definition
- Market failure
- Market failure is a situation where the free market, left to its own devices, is unable to achieve optimal economic efficiency.
- Not to be confused with: Government failure
- Government failure is government intervention that itself results in an inefficient allocation of resources, such as a subsidy for a polluting good or regulation that causes shortages.
Test yourself
What is the difference between market failure and government failure?
Market failure is the market misallocating resources; government failure is an intervention that itself misallocates them.