Abstract Although, dairying is the most ancient occupation established in the rural setting of Bangladesh, its development is unsatisfactory due to several problems. The main problems concern breeding, feeding, management, diseases and marketing. The dairy sector has also not received adequate attention in respect of information and research with present policies and issues. National milk production can only meet 13% of the current milk consumption. The demand for milk is growing at a faster rate than supply because of the rapid increase in population, creating a widening imbalance between demand and supply. There is a need to have knowledge of the existing demand, its growth over time, and the existing supply possibilities. There are also many types of information needed for proper functioning of markets. In the light of such knowledge it would be necessary to take policy measures for providing strong institutional support to increase domestic production and reduce the imbalance between supply and demand. To address the industry’s problems effectively, sources of market failures and of government policies in contributing to its poor performance are discussed in this paper.