Auto manufacturers are currently offering flex-fuel vehicles that are designed to run on ethanol gasoline mixtures. An economist recently analyzed the cost versus value consideration of these vehicles and found that the market is currently buying approximately the socially efficient amount of flex fuel vehicles. Under lobbying pressure from the car manufacturers and environmental groups, the federal government is considering a $3,000 subsidy paid per flex fuel vehicle sold. If this subsidy goes through, what would be the most likely impact on market efficiency?.

Market efficiency is the extent to which market prices accurately reflect all pertinent information that is currently accessible. Since there are flex fuel no securities that are undervalued or overvalued if markets are efficient, there is no way to "beat" the market because prices already reflect all available information.

Market efficiency comes in three different levels. The ineffective aspect of market efficiency is that it makes no sense to predict future prices based on historical price movements. Any information that may be flex fuel gathered from historical pricing, if any, is already included into present prices if all accessible, relevant information is taken into account. Consequently, changes in prices in the future can only be the consequence of new information being accessible.

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