One problem in any technical field is that some technical terms sound like ordinary language, and people outside the field, familiar with their ordinary meaning, mistakenly assume they understand them. Consider all the people who think they really understand the theory of relativity - except for the details. "Everything is relative. That makes sense." The term 'market failure' raises the same problem because it sounds as though it means the failure of markets. Market failure is a real phenomenon, a real problem in the organisation of human societies, but it has nothing in particular to do with markets - or at least, it has no more to do with markets than it has to do with governments, battles, families and much else.

My purpose is to explain what market failure means, why its existence is commonly employed as an argument for government regulation of markets, and finally why, while it is an argument against free markets, it is a stronger argument against the alternatives. As we will see, the problem described by 'market failure' occurs both in private markets and in the political and regulatory systems that are the usual alternatives to the private market, but is very much more common in the latter.