Definition The situation in which the following characteristics developed in the market is termed as Market failure. Market Power The ability of a firm to set its price above marginal cost is called market power. The main aim of the government is to create perfect competition in the market. But many times it is not possible. There always exist some firms that have an advantage over the other firms operating in the same industry. These firms gain sustainable competitive advantage by having a larger market share, high technology, competitive market position, and/or financial support. In many instances a single firm may be able to service the market or the government may wish to allow the firm to practice monopoly. When the economies of scale are larger, the government may allow the firm to practice monopoly but choose to regulate the price of the firm’s products. Externalities The effects on the third party who is not part of the decision-making process are termed as the Externalities. There are two types of externalities; positive externalities and negative externalities. Positive externalities are the benefits that are received by the party which is not involved in the production or consumption of a good. For example, the benefits of the immunization of the public, which eventually leads to building a healthy society, benefit all the people irrespective of their participation in the process. The government programs aiming at imparting education to everyone lead to the building of a knowledgeable society. This initiative benefits the whole nation. (Medema, Steven G. 2004). Public Goods Public goods are the goods, which can be consumed by everyone. The goods are not paid for by anyone or the benefits are received by everyone. These benefits cannot be allocated to any single person; clean air, sunlight, etc. In general, if no one pays for these goods, everyone along with the purchaser will be benefited. Thus, there is little or no major incentive for the purchaser. This very factor leads to the free ride phenomenon. It would be advantageous for a firm to contribute to public goods in its marketplace to create goodwill in the market. The same thing goes with the individuals as well. The benefit arising from paying for the public good is not exclusive for any individual, thus everyone would be willing not to pay for them, which eventually fails in the market in providing public goods. If the firm’s goal is to maximize profits, the last dollar spent on contributions to public projects should bring in one additional dollar in revenue. Incomplete Information The information about the product and services to all the interested parties is important for the market to operate efficiently. The participants must have good knowledge about the product or service’s features, price, benefits, risks, and the available technologies. The incomplete information will eventually result in inefficiencies in the market functioning, usage, and the firm’s output. (Bator, 1998) The severe causes of market failure are asymmetric information, a situation where some market participants have better information than others. The presence of asymmetric information can lead buyers to refuse to purchase from sellers or of fear