Allocational Efficiency

AAA

DEFINITION of 'Allocational Efficiency'

A characteristic of an efficient market in which capital is allocated in a way that benefits all participants. Allocational efficiency occurs when organizations in the public and private sectors can obtain funding for the projects that will be the most profitable, thereby promoting economic growth.

INVESTOPEDIA EXPLAINS 'Allocational Efficiency'

In order to be allocationally efficient, a market must meet the prerequisites of being both informationally efficient (where much is known by all), and transactionally or operationally efficient (where transaction costs are reasonable and fair). If all conditions are met, capital flows will direct themselves to the places where they will be the most effective, providing an optimal risk/reward scenario for investors.

RELATED TERMS
  1. Capital Markets

    Markets for buying and selling equity and debt instruments. . ...
  2. X-Efficiency

    The degree of efficiency maintained by individuals and firms ...
  3. Frictionless Market

    A theoretical trading environment where all costs and restraints ...
  4. Operational Efficiency

    A market condition that exists when participants can execute ...
  5. Inefficient Market

    A theory which asserts that the market prices of common stocks ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
RELATED FAQS
  1. What is GDP and why is it so important to investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents ... Read Full Answer >>
Related Articles
  1. Economics

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  2. Economics

    What Is The Labor Market Conundrum?

    We are facing a conundrum with investment implications: Why are wages still stagnant, when jobs are being created at the fastest pace since the late 90's?
  3. Economics

    Understanding Impairment

    In finance and accounting, impairment refers to the loss of value of a company’s capital stock.
  4. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  5. Economics

    What is a Promissory Note?

    A written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
  6. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  7. Personal Finance

    Why Are Tesla Cars So Expensive?

    What makes Tesla cars so expensive? Short supply and pricey parts is a good place to start.
  8. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  9. Economics

    What is M1?

    M1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
  10. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center