Why is a free market a type of market failure?
In a free market, there is profit to be made by making the free market not a free market. Therefore, a completely free market destroys itself.
A free market economy needs government intervention due to market failure. Market failures occur when the basic assumptions of efficient markets are not met in normal circumstances and this causes an inoptimal allocation. Some examples of market failure include: imperfect information; lack of competition; non-convex preferences; incomplete or endogenous preferences; externalities.
There are two similar but significantly different definitions of "market failure": A situation where the motivations of market-actors prevent the market from reaching maximally efficient equilibrium over time A situation in which allocation of goods and services by a free market is currently not maximally efficient at a given time. The first definition is the more meaningful definition in relation to government policy. An often seen incorrect definition of market failure is when the quantity…
Market failure is when there is a misallocation of resources, such that merit goods are underprovisioned and demerit goods are overprovisioned. If a market does not fail, it means that the supply of the products, or the demand for these products, takes into account the social cost of production. The result of market failure on the supply and demand model is disequilibrium. The implementation of taxation and subsidies are two methods to correct market failure.