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For many, market failure is taken for granted as an accepted economic principle, when in fact it can be quite controversial. "Market Failure" is most commonly defined as a failure of the market to achieve economic efficiency, that is, a failure of the market to allocate scarce resources to their best, most optimal use. Classic examples of market failure include the under provision of public goods like national defense and negative externalities like pollution.

Market failure is often mislabeled. Because market failure is widely accepted as a legitimate reason for government intervention, politicians and policymakers with an interest in government programs and regulations will label the problems those programs and regulations address as market failures just to get them adopted. Therefore, things like monopolies, inequality, information failures, the business cycle, and merit goods -- goods people might under consume like libraries, education, and health services -- are often labeled as market failures.

But when scarce resources are not being put to their most optimal use, it is most often caused by some prior government intervention or a failure of the judiciary to protect people from bearing unfair external costs. Ironically, the solution to "market failure" caused by government intervention is often more government intervention.

Healthcare is maybe the best example of a mislabeled market failure. People often underutilize their healthcare and don't go to the doctor enough, though it is important to note healthcare is also often overutilized. When people fail to go to the doctor, their diseases are diagnosed at a much later stage, when it is more expensive to treat. For the insured, the insured pool picks up the higher costs and for the uninsured, the taxpayer picks up the higher costs. In this instance, the market failure exists because the social cost to the insured pool or the taxpayer of an individual not going to the doctor is higher than the individuals cost of going to the doctor. The market has "failed" to deliver the lowest cost alternative.

This "market failure" is often used as an excuse for government to intervene in the healthcare market, especially by those advocating universal healthcare provided by the government. However, the problem with the healthcare market can be traced not to any failed market, but rather, to the burdensome government regulations and expensive healthcare mandates. Thus, one government intervention, universal healthcare, is proposed to fix the market failure (economists actually call these nonmarket failures) caused by prior government intervention, burdensome regulations, and expensive mandates.