When private decisions are based on market prices that do not reflect the real scarcity of goods and services but rather reflect market distortions, they do not generate an efficient allocation of resources but cause welfare losses. A market distortion is any event in which a market reaches a market clearing price that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and the ownership of private property. Examples of factors causing market prices to deviate from real economic scarcity are environmental externalities, public goods, monopoly power, information asymmetry, transaction costs and non-rational behaviour.
MARKET FAILURE
