Efficient Market Hypothesis

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The efficient market hypothesis is the idea that without external intervention causing friction the market will always clear and be the best mechanism for macro-level resource allocation; what is called Pareto optimality. In order to have so-called efficient markets, every agent must be a price taker. Agents are price takers when they act on the belief that the terms on which they can transact cannot be affected by their own behavior. These conditions only really hold within a pure market. Within this paradigm, pure markets are always seen to be the most efficient. Anything that deviates from the free market is seen to be suboptimal and these deviations are typically thought to derive from exogenous factors that add friction to the system.