Question

• how could you decide that a market-equilibrium allocation is likely inefficient?

Answer 1

when there is a discrepancy between the price that the buyers are willing to pay and the price at which the sellers are willing to sell then there can be an inefficiency in the market. Market equilibrium allocation is generally efficient because it results in maximizing the total welfare of all the individuals participating in the market.

This is not achieved when the allocation increases the welfare of some participants at the expense of the others. This reduction in the efficiency is known as deadweight loss. Price ceiling and price floor are two examples in which market equilibrium allocation is inefficient because they prevent the price from reaching and equilibrium.