What does the term market failure refer to?

Market failure describes a situation in which the allocation of goods and services by a free market is not efficient. This inefficiency can result in overproduction or underproduction of goods and services, which can lead to lost economic value. Factors contributing to market failure include externalities (costs or benefits that affect third parties who are not involved in the transaction), public goods (goods that are non-excludable and non-rivalrous, leading to underproduction), and information asymmetries (when one party has more or better information than the other).

In contrast, the other choices do not accurately capture the essence of market failure. The effectiveness of resource allocation represents a well-functioning market, while a surplus of goods suggests that there is an imbalance, but not necessarily a failure in the market principles themselves. Similarly, government regulations may impact market operations but do not directly define market failure, which prioritizes efficient outcomes over regulatory influences.