What is a primary cause of market failure in an economy?

A primary cause of market failure in an economy is negative externalities, which occur when the actions of individuals or businesses have harmful effects on others who are not involved in the transaction. For example, if a factory pollutes a river while producing goods, the nearby community suffers from dirty water and health problems, but the factory does not pay for these damages. This situation leads to a market failure because the true costs of production are not reflected in the prices of the goods, causing overproduction and environmental harm. When negative externalities are present, the market cannot efficiently allocate resources, resulting in a less desirable outcome for society as a whole. Therefore, addressing negative externalities is important to improve overall welfare and ensure that all costs and benefits are considered in economic decisions.