Market failures occur when the allocation of goods and services by a free market is not efficient. This can happen for various reasons, such as the presence of externalities, where the actions of individuals or businesses affect others who are not involved in the transaction. For example, pollution from a factory can harm the health of nearby residents, leading to costs that are not reflected in the market price. Another cause of market failure is the existence of public goods, which are non-excludable and non-rivalrous. This means that one person's use of a public good, like national defense, does not reduce its availability to others, and it is difficult to charge individuals for their use. As a result, these goods may be underproduced or not produced at all, leading to inefficiencies in the market.