Allocational Efficiency

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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.

BREAKING DOWN '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.

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