What is meant by market failure?

There are two similar but significantly different definitions of "market failure":

1. A situation where the motivations of market-actors prevent the market from reaching maximally efficient equilibrium over time
2. 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 of a product demanded by consumers is not equal to the quantity supplied by suppliers. That is instead called a shortage or surplus.