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efficient market

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Which one of these options is not included in the criteria of an “efficient market”?

  1. many buyers and sellers
  2. no barriers to entry and market is perfectly competitive
  3. perfect information
  4. positive externalities do exist.

Market efficiency

Market efficiency can be defined as a state whereby the relevant information in the market are reflected by the market price. This means that that the securities in the market are neither overvalued or undervalued. There is no possibility of beating the market in an efficient market due to the fact that all necessary available information to any individual or firm is already adopted in the market price.

Answer to the Question

There are a number of factors that can be used to determine if a market is efficient or not. They include; information that is available about the state and happening in the market available to all traders. The type of competition that is displayed in the market, and the number of buyers and sellers serving the market.

The existence of positive externalities is not included as an option in determining whether the market is efficient.

The correct answer is therefore (4)

 

 

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