What is market failure?

Market failure is when the allocation of resources in a market is inefficient.
This includes,

Monopoly:
Monopoly is when one firm owns all or the majority of the market.

For example, the American postal service is an example of a monopoly in the US. Therefore, it can adjust the price to whatever they want, because people have no alternatives- which means the price and demand for postal services are very inelastic. This can be a disadvantage because the price may go out of control so they'll be unreasonably overpriced.

Externalities:
Externalities occur when an economic transaction affects other parties that are not directly involved in the transaction.

There are many different types of externalities:

External Cost (Social Cost)
External cost is when an economic transaction effects other parties nthat are not directly involved in the transaction, negatively. In another words, it is a bad externality.

For example, when a factory produces toys, they produce a certain amount of waste for every 10 toys.The waste gas from the factory has been emitted into the air- which will cause air pollution, and that leads to green house effect where the hole in the ozone layer will then be bigger.

External Benefit (Social Benefit)
Same thing, external benefit is when an economic transaction effects other parties that are not directly involved in the transaction, positively. In another words, it is a good externality.

An example for that would be when a town councils buys buses off the market, though money is spent, but they decrease the pollution on the earth; the pollution that is decreased would be an external benefit.

Towards these market failures, government comes up solutions towards it:

Competition Policy:
Competition Policy is laws that the government creates to avoid from monopolies happening- seeing as it creates a negative impact to the market.

Having full price control in the market and the high unemployment will create a negative effect to the society.

Subsidies:

Subsidies are payments made to producers to help reduce their costs of production.

Seeing as having subsidies, producers will tend to increase supply at every given price, because when supply increases the market price will tend to fall, to the benefit for the consumers.

For example, less and less people are producing rice in China, seeing as people have a better paid job rather then depending on the low rice revenue. So there’s a low supply for rice, when Chinese relies strongly on rice.

Therefore, the government comes up with the plan of subsidies, to pay $10 for each kg rice are produced, in order for the farmers to increase on the supply and lower the price a little more; and that, is how the government avoid from market failure from happening.