Market Failure: 

When the normal operation of market forces may not lead to economic efficiency, it is termed as market failure. There are several reasons for market failure:

Public Goods such as street lighting, defence, parks, lighthouses are not provided by the free market because of their two main characteristics which are non-excludability - where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy, and non-rivalry where the consumption of a good or service by one person will not prevent others from enjoying it. Because of their nature the private sector is unlikely to be willing and able to provide public goods. The government therefore provides them for collective consumption and finances them through general taxation.

Merit Goods, such as health services, education, public libraries are those goods and services that the government feels that people left by themselves will under-consume and which therefore ought to be subsidized or provided free at the point of use.

Both the public and private sector of the economy can provide merit goods & services. Consumption of merit goods is thought to generate positive externality effects where the social benefit from consumption exceeds the private benefit.

The existence of monopoly power is often thought to create the potential for market failure and a need for intervention to correct for some of the welfare consequences of monopoly power.

The potential market failures arising from externalities are that the social optimum output or level of consumption diverges from the private optimum. The main problem is the absence of clearly defined property rights for those agents operating in the market. When property rights are not clearly defined, market failure is likely because producers and consumers may not be held to account. Market failure can also be caused by the existence of inequality throughout the economy.