What does market failure refer to?

Market failure refers to a situation where the allocation of goods and services by a free market is not efficient, leading to a net social welfare loss. In the context of economics, inefficiency can arise due to several reasons, such as externalities, public goods, or monopolies that distort the natural workings of supply and demand.

When there is market failure, the resources are not allocated in a way that maximizes societal welfare. For example, in the case of negative externalities, such as pollution, the market may produce more of a good than is socially optimal, as the costs imposed on society are not reflected in the price of the good. Therefore, option C accurately captures this concept by linking market failure to the inefficient allocation of goods and services, which can result in an overall loss of economic efficiency and welfare.

On the other hand, the other choices do not align with the definition of market failure. Efficient allocation of resources suggests that all resources are perfectly utilized, which is the opposite of what market failure implies. Government intervention in markets can sometimes correct market failures rather than define them, and high levels of consumer satisfaction typically indicate that the market is functioning well, also contradicting the notion of market failure.