False. A market failure is a situation where the free-market is not resulting in an efficient result.
Here are three commonly cited market failures:
- Pollution and other negative externalities. In a free-market, there shouldn't be much regulation, so firms can produce however they would like. This can include production choices that involve polluting or hurting the environment. This is a market failure because the firm is creating costs that are not being paid for by the consumer or producer.
- Monopolies. In the absence of regulation, some successful firms will create less competitive environments and gain monopoly power over the market. If the gain monopoly power, they can charge higher prices and reduce the quantity in the market. Economists call this a deadweight loss and thus a market failure.
- Information Asymmetry. In a competitive, efficient market, both buyers and sellers will have good information regarding the goods or services. If one party has more information than the other, a market failure will arise because the party with less information might make a bad purchase.
These market failures are reasons that policymakers create laws and regulations that move an economy away from a free market.
