An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers does

not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.

Investopedia explains 'Market Failure'

Market failures have negative effects on the economy because an optimal allocation of resources is not attained. In other words, the social costs of producing the good or service (all of the opportunity costs of the input resources used in its creation) are not minimized, and this results in a waste of some resources. Take, for example, the common argument against minimum wage laws. Minimum wage laws set wages above the going market-clearing wage in an attempt to raise market wages. Critics argue that this higher wage cost will cause employers to hire fewer minimum-wage employees than before the law was implemented. As a result, more minimum wage workers are left unemployed, creating a social cost and resulting in market failure. Government failure (or non-market failure) is the public sector analogy to market failure and occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention. Likewise, the government's failure to intervene in a market failure that would result in a socially preferable mix of output is referred to as passive Government failure (Weimer and Vining, 2004). Just as with market failures, there are many different kinds of government failures that describe corresponding distortions. The term, coined by Roland McKean in 1965,[1] became popular with the rise of public choice theory in the 1970s. The idea of government failure is associated with the policy argument that, even if particular markets may not meet the standard conditions of perfect competition, required to ensure social optimality, government intervention may make matters worse rather than better. Just as a market failure is not a failure to bring a particular or favored solution into existence at desired prices, but is rather a problem which prevents the market from operating efficiently, a government failure is not a failure of the government to bring about a particular solution, but is rather a systemic problem which prevents an efficient government solution to a problem. The problem to be solved need not be a market failure; sometimes, some voters may prefer a governmental solution even when a market solution is possible. Government failure can be on both the demand side and the supply side. Demand-side failures include preference-revelation problems and the illogics of voting and collective behaviour. Supply-side failures largely result from principal/agent problems.[2] Public Goods

Public Goods not provided by the free market because of their two main characteristics

Non-excludability where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy Non-rivalry where the consumption of a good or service by one person will not prevent others from enjoying it

Examples: Street lighting / Lighthouse Protection, Police services, Air defence systems, Roads / motorways, Terrestrial television, Flood defence systems, Public parks & beaches Because of their nature the private sector is unlikely to be willing and able to provide public goods. The government therefore provides them for collective consumption and finances them through general taxation. Merit Goods Merit Goods are those goods and services that the government feels that people left to themselves will under-consume and which therefore ought to be subsidised or provided free at the point of use. Both the public and private sector of the economy can provide merit goods & services. Consumption of merit goods is thought to generate positive externality effects where the social benefit from consumption exceeds the private benefit. Examples: Health services, Education, Work Training, Public Libraries, Citizen's Advice, Inoculations Monopoly Few modern markets meet the stringent conditions required for a perfectly competitive market. The existence of monopoly power is often thought to create the potential for market failure and a need for intervention to correct for some of the welfare consequences of monopoly power.

GOVERNMENT INTERVENTION AND MARKET FAILURE Government intervention may seek to correct for the distortions created by market failure and to improve the efficiency in the way that markets operate

Pollution taxes to correct for externalities Taxation of monopoly profits (the Windfall Tax) Regulation of oligopolies/cartel behaviour

Direct provision of public goods (defence) Policies to introduce competition into markets (de-regulation) Price controls for the recently privatised utilities

Examples of government failure include: 1. Government can award subsidies to firms, but this may protect inefficient firms from competition and create barriers to entry for new firms because prices are kept artificially low. Subsidies, and other assistance, can lead to the problem of moral hazard. 2. Taxes on goods and services can raise prices artificially and distort the efficient operation of the market. In addition, taxes on incomes can create a disincentive effect and discourage individuals from working hard. 3. Governments can also fix prices, such as minimum and maximum prices, but this can create distortions which lead to:

Shortages, which may arise when government fixes price below the market rate. Because public healthcare is provide free at the point of consumption there will be long waiting lists for treatment. Surpluses, which may arise when government fixes prices above the natural market rate, as supply will exceed demand. For example, guaranteeing farmers a high price encourages over-production and wasteful surpluses. Setting a minimum wage is likely to create an excess of supply of labour in markets where the market clearing equilibrium is less than the minimum.

4. Information failure is also an issue for governments, given that government does not necessarily know enough to enable it to make effective decisions about the best way to allocate scarce resources. Many economists believe in the efficient market hypothesis, which assumes that the market will always contain more information than any individual or government. The implication is that market prices and market movements should be free from interference because markets cannot be improved upon by individuals or governments. 5. Excessive bureaucracy is also a potential government failure. This is caused by the public sector when it tries to solve the principal-agent problem. Government must appoint bureaucrats to ensure that its objectives are pursued by the managers of public sector organisations, such as the NHS. 6. Finally, there is the problem of moral hazard associated with the payment of welfare benefits. If individuals know that the state will provide unemployment benefit, or free treatment for their poor health, they are less likely to take steps to improve their employability, or to avoid activities which prevent poor health, such smoking, a poor diet, or lack of exercise.