Allocational Efficiency

Allocational efficiency

The effectiveness with which a market channels capital toward its most productive uses.

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Allocational Efficiency

A condition in a market when all capital and other resources are assigned to projects with the highest profitability. Allocational efficiency is thought to benefit all economic actors to the greatest possible extent. In an environment of allocational efficiency, only the projects with the highest potential profitability receive funding and then only in the precise amount that is needed. Allocational efficiency assumes that the market is already informational and operationally efficient, that is, that all pertinent knowledge is public and non-income producing expenses (i.e. fees) are reasonably priced or non-existent. An allocatively efficient market has no imperfections and therefore does not exist in practice. However, markets can contain it to a greater or lesser extent. See also: Market failure.