One case of this occurs with moral hazard , in which a principal employs an agent to work in the principal's interests, but the agent has incentive to maximize his own well-being instead. This becomes a problem leading to market failure when the agent has information that the principal does not have, because then the principal lacks the ability to force the agent to do the desired action. A moral hazard problem is often said to exist between the owners a firm and the managers they hire to operate the firm. Adverse selection occurs when market participants with undesirable characteristics are pooled together. Finally, market power can contribute to market failure.
Market power is the ability to influence price in the market.
A monopolist, for example, charges a higher price than would be the case in a competitive industry. It is not the high price or the resulting profit that is problematic, so much as the deadweight loss caused by pricing above marginal cost. Whenever individual actors can alter the market price, on either the buyer or seller side, there is the potential for price being different from marginal cost, creating with it deadweight loss. Economic analysis features prominently in most antitrust litigation. Some economists may say that the market fails in some respects even if it allocates resources efficiently.