What market efficiency does not imply:
And this is an implication ofmarket being efficient.
Proposition 1: The probability of finding inefficiencies in an asset market decreases as the ease of trading on the asset increases. To the extent that investors have difficulty trading on a stock, either because open markets do not exist or there are significant barriers to trading, inefficiencies in pricing can continue for long periods.
This does not contradictwith the market being efficient or not.
The deadweight loss from a monopoly is illustrated in . The monopolist produces a quantity such that marginal revenue equals marginal cost. The price is determined by the demand curve at this quantity. A monopoly makes a profit equal to total revenue minus total cost. When the total output is less than socially optimal, there is a deadweight loss, which is indicated by the red area in .
MARKET EFFICIENCY - DEFINITION AND TESTS
Implication of the hypothesis
An implication of securities market efficiency is that a security’s market price should fluctuate randomly over time. The reason being anything about a firm that can be expected will be properly reflected in its security price by the efficient market as soon as the expectation is formed. The only reason that prices will change is if some relevant, but unexpected, information comes along and unexpected events occur randomly.
ECMC49Y Market Efficiency Hypothesis Practice Questions
Deadweight loss arises in other situations, such as when there are quantity or price restrictions. It also arises when taxes or subsidies are imposed in a market. Tax incidence is the way in which the burden of a tax falls on buyers and sellers—that is, who suffers most of the deadweight loss. In general, the incidence of a tax depends on the elasticities of supply and demand.