Market failure occurs when the free market fails to allocate resources efficiently, leading to negative externalities, underproduction or overproduction of goods and services, and unequal distribution of income. To avoid market failure, governments can implement various policies and regulations.
Avoiding market failure is crucial as it ensures optimal resource allocation, promotes economic efficiency, and fosters a fair and competitive market environment. Historically, market failures have led to significant economic crises and social unrest, highlighting the importance of addressing them.