when markets fail the individual incentives for rational behavior do not lead to rational outcomes for the group in other words each individual makes the correct decision for themselves but those prove to be the wrong decisions for the group as a whole 
matthew collins investopediaunderstanding market failurea market failure refers to the inefficient distribution of resources that occurs when the individuals in a group end up worse off than if they had not acted in rational self interest in the case of a market failure the overall group incurs too many costs or receives too few benefits the economic outcomes under market failure deviate from what economists usually consider optimal and are usually not economically efficient 1contrary to what the name implies market failure does not describe imperfections only in market economies there can be market failures in government activity too one noteworthy example is rent seeking by special interest groups 2 special interest groups can benefit by lobbying for small costs on everyone else such as through a tariff when each small group imposes its costs the whole group is worse off than if no lobbying had taken place not every bad outcome from market activity counts as a market failure in addition while correcting the imbalances underlying a market failure often requires government intervention private market actors may also be able to solve the problem on the flip side not all market failures have a potential solution even with prudent regulation or extra public awareness 3causes of market failurethere are many types of imbalances that can affect the equilibrium of the markets the following list provides an overview of some common causes of market failure solutions to market failurethere are many potential solutions for market failure these can take the form of private market solutions government imposed solutions or voluntary collective action solutions 