What is meant by market failure?

Market failure refers to a situation in which the allocation of goods and services by a free market is not efficient, often leading to a net loss of economic welfare. This occurs when resources are not used in a way that maximizes potential benefits, resulting in inefficiencies.

The correct choice captures the essence of market failure, which is fundamentally about the inefficient allocation of resources. This can happen for various reasons, such as the presence of externalities, monopolies, or public goods, where the market does not account for all costs and benefits involved in economic transactions. In these instances, the market fails to deliver outcomes that would maximize overall welfare, leading to a situation where some individuals or groups do not receive the benefits they could if resources were allocated more efficiently.

Understanding this concept is crucial for analyzing economic policies and considering interventions that might correct these inefficiencies, such as regulation or government provision of public goods.