Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not

efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with information asymmetries, non-competitive markets, principal-agent problems, externalities, or public goods. The existence of a market failure is often used as a justification for government intervention in a particular market. Economists, especially microeconomists, are often concerned with the causes of market failure, and possible means to correct such a failure when it occurs. Such analysis plays an important role in many types of public policy decisions and studies. However, some types of government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations, including attempts to correct market failure, may also lead to an inefficient allocation of resources, (sometimes called government failures).Thus, there is sometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions. But either way, if a market failure exists the outcome is not pareto efficient. Mainstream neoclassical and Keynesian economists believe that it may be possible for a government to improve the inefficient market outcome, while several heterodox schools of thought disagree with this.

Public goods
Main article: Public goods Some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile.

Externalities
Main article: Externality The actions of agents can have externalities, which are innate to the methods of production, or other conditions important to the market. For example, when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel. If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society.

Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing. In this case, the market equilibrium in the steel industry will not be optimal. More steel will be produced than would occur were the firm to have to pay for all of its costs of production. Consequently, the marginal social cost of the last unit produced will exceed its marginal social benefit. Common examples of an externality are environmental harm such as pollution or overexploitation of natural resources. Traffic congestion is an example of market failure, since driving can impose hidden costs on other drivers and society. Solutions for this include public transportation, congestion pricing, toll roads and toll bridges, and other ways of making the driver include the social cost in the decision to drive.