What’s the difference between market efficiency (as in efficient market hypothesis) and allocative efficiency? Do they mean the same? or are they connected?


1 Answer 1


These words are somewhat context dependent, but let's have a go at an answer.


Market efficiency: Prices reflect all available information.
In the EMH this is usually used in the context of financial markets and asset prices. A brief explanation: event X affects the price of asset Y. When event X becomes public, the price (in theory) immediately adjusts to reflect its effect; hearing about 5 minutes later you are no longer have an incentive to quickly buy or sell asset Y.

Allocative efficiency: Resources used in production, as well as final goods and services are allocated in an efficient way; altering the allocation could not result in a Pareto-improvement.


Allocative efficiency can in theory exist without prices and markets, e.g., in a command economy, while market efficiency cannot, thus the two concepts are not identical.

According to the First Welfare Theorem a competitive market where all actors are rational and everyone has perfect information leads to allocative efficiency. It is not believed that these conditions are fulfilled in real world markets; however there are people who believe that some markets are close to fulfilling them.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.