Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. This happens when the market does not supply products in the correct quantity or at the price consumers want to pay due inefficiency in the allocation of goods and services. A price mechanism fails to account for all of the costs and benefits involved when providing or consuming a specific good. When this happens, the market will not produce the supply of the good that is socially optimal — it will be over or under produced. In order to fully understand market failure, it is important for you to recognize the reasons why a market can fail.
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