What characterizes market failure?

Market failure is characterized by an inefficient allocation of resources, which leads to a loss of economic welfare. This situation arises when the market fails to allocate goods and services in a way that maximizes total net benefits to society. In efficient markets, resources are distributed in a way that neither consumers nor producers can improve their situation without making someone else worse off.

When market failure occurs, it may result from various factors like externalities, public goods, monopolies, or information asymmetries, which prevent the market from functioning optimally. As a result, some goods may be overproduced or underproduced, leading to consumer dissatisfaction and a decrease in overall economic welfare. Therefore, recognizing market failure is vital for informed economic policy, as it highlights areas where government intervention may be necessary to improve outcomes.