Market efficiency

Market efficiency describes how effectively a market allocates resources or enables gains from trade. It can concern allocative outcomes, transaction costs, or how prices incorporate information.

Allocative efficiency: A condition in which resources go to their highest-valued uses, given available resources and preferences. This is the resource-allocation meaning of market efficiency.
Price mechanism: The adjustment of prices that coordinates buyers’ and sellers’ decisions in a market. Price changes convey scarcity and help redirect resources toward valued uses.
Informational efficiency: The degree to which asset prices reflect available information. It concerns information in prices, not whether resources are allocated efficiently.
Consumer surplus: The difference between what buyers are willing to pay and what they actually pay. It measures one part of the gains generated by market exchange.
Coase theorem: A result that bargaining can reach an efficient allocation when property rights are defined and transaction costs are zero. Its assumptions highlight how bargaining costs and institutional details affect efficiency.
Pareto efficiency: A state where no person can be made better off without making someone else worse off. Economists use this criterion to assess whether an allocation leaves mutually beneficial changes unrealized.
Supply and demand: The relationship between the quantities buyers demand and sellers offer at different prices. Their interaction determines market prices and quantities in the basic efficiency model.
Operational efficiency: The degree to which a market processes transactions quickly and at low cost. A market can trade cheaply yet still allocate resources poorly.
Producer surplus: The difference between the price sellers receive and the minimum they would accept. Together with consumer surplus, it tracks gains from trade in standard analysis.
Information asymmetry: A condition in which parties to an exchange possess different information relevant to the transaction. Unequal information can distort choices, prices, and the allocation of resources.

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