The provision of private prisons is likely to be at potential risk of market failure.

Market failure is a term which describes situations in which free market fails to efficiently provide resources even if there is existing demand for them. In this case we would speak of missing markets, which is the type of market failure where the market for a specific good or service would not even form because it would not be clear who would pay for it even though the society has the need for it. Almost all public goods have to be provided by the government as a result of missing markets failure. In this case the government decided to partially outsource the provision of jails to the hands of private contractors which can avoid some inefficiencies that often arise in the management of public goods provision. However, it still has to motivate the contractors with providing sufficient subsidies in order for such markets to form and last.b