“Market failure,” like many technical terms, is a misleading label. Not all ways in which markets fail count as market failure and market failure occurs in many contexts other than markets.

Market failure exists because individuals are making decisions much of whose cost or benefit goes to someone else. That situation sometimes occurs on the private market but there it is the exception, not the rule. Most goods are ordinary private goods, so the producer can convert much of the benefit to the buyer into a benefit to himself via the price he charges. Most production uses inputs — labor, raw materials, capital, land — that the producer can only use if he compensates their owners for what they give up by letting him use them. In the standard model of perfect competition, which assumes away problems such as public goods and externalities, what the producer is paid for a good turns out to be just what it is worth to the purchaser, what he buys inputs for to be just what they are worth to the seller, hence his private benefit is precisely equal to the social benefit, the total effect of his actions summed over everyone.