Market failure is when there is an inefficient distribution of goods and services that leads to lack of

equilibrium in a free market. The common interpretation of market failure is the failure of the market to
live up to the standards of perfect competition that leads to an efficient distribution of goods and
services,the idea is applied in general equilibrium when the law of demand and supply fail to reach to the
state of equlbrium
Market failure can be caused by the following analyzed causes.

Externalities occurs when the consumption of a good or services benefits or harms a third party,
negative externalities leads to inefficient allocation of resources in the free market, externalities
lead to market failure because a product services price equilibrium does not accurately reflect the
true costs and benefits of that product service, Externalities may be positive or negative.
Example oe externalities causing market failure is the pollution resulting from a mining
activities, example in Geita region, and the mining activities has affected a large area around
mining areas, such as building large apartments and drinking rain water
Common forest ,common forest causes a market failure in a sense that are non-excludable and
are not divisible ,and private market has no incentive to provide such goods ,example no private
market may supply water in the society leading to a missing markets, A public goods causes an
inefficiency allocation of resources
Examples provision of public health, since no one can be excluded from consumption and no
opportunity cost can be imposed, this leads to market failure.
Moral hazard ,rises when we cannot measure costless observe peoples actions and so we cannot
judge whether apoor outcome reflects poor fortune or poor effort on them, moral hazard is an
economic problem, and can occur when governments make the decision to bail out large
corporations, example moral hazards happens in insurance.Moral hazard does so because one
party is creating a larger cost on another party, which would result in significantly high costs to
an economy if done on a macro sale.
Example, if a house has not been insured from any future damages, it implies that a loss will be
completely borne by you at a time of a mishappening like fire or burglary. But if the house is
insured nothing will be lost,most examples of a moral hazard are found in insurance companies.
Adverse selection,Adverse selection occurs when there is asymmetric information between
buyers and sellers ,this unequal information disorts the market and leads to market failure,one
example of the adverse selection is that of health insurance .The people who are mostly like to
purchase health insurance are those who are mostly like to use it,ie people with un healthyblife
styles and those with underlying issues .The insurance being aware of this raises the average
price of the insurance cover,this prices healthy consumers out of the market as healthy people
will be unwilling to pay such high premium.The result is that only high risk individuals buy
insurance,this is a market failure,another example is the used car market.
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