<p>These words are somewhat context dependent, but let's have a go at an answer.</p>
<hr />
<p><strong>Definitions</strong></p>
<p>Market efficiency: Prices reflect all available information. <br>
In the EMH this is usually used in the context of <em>financial</em> markets and <em>asset</em> 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.</p>
<p>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.</p>
<hr />
<p><strong>Relation</strong></p>
<p>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.</p>
<p>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.</p>

CC BY-SA 4.0
2022-03-09T05:23:03.687Z
2022-03-09T05:23:03.687Z
Giskard
<p>What’s the difference between market efficiency (as in efficient market hypothesis) and allocative efficiency? Do they mean the same? or are they connected?</p>

<efficient-markets>
Efficiency in the market
Kmd
# Efficiency in the market

(Asked by: username_0 on 2022-03-09)

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

**Tags:** efficient-markets

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## 1 answers

### Answer by username_1 on 2022-03-09. Score: 3

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

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**Definitions**

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.

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**Relation**

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.


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