Economists use the term market failure to refer to a situation in which the market on its own fails to produce an efficient allocation of resources. As we will see, one possible cause of market failure is an externality, which is the impact of one person’s actions on the well-being of a bystander. The classic example of an externality is pollution. When the production of a good pollutes the air and creates health problems for those who live near the factories, the mar- ket left to its own devices may fail to take this cost into account. Another possible cause of market failure is market power, which refers to the ability of a single person or firm (or a small group) to unduly influence market prices.