Markets are central to the functioning of modern societies. They coordinate the economic activities of millions of individuals and firms, and are a source of prosperity. But they may also fail and generate undesirable outcomes. Market forces may contribute to inequality of income and wealth. Prices that do not properly reflect the damage inflicted upon the environment by economic activities undermine efforts to prevent climate change. And the failure of financial markets has led to the global financial crisis, causing a deep recession and taxpayer-funded bank rescues. This calls for the correction of market outcomes through public policy.
Market failures have long been recognized as a justification for policy interventions. The traditional perspective emphasizes market power, externalities and information asymmetries as sources of market failures and tackles them by regulation, taxation or public goods provision.