The emergence of the Internet as a locus for commercial activities in the form of "e-commerce" has led some economists to conclude that new possibilities for development of a truly and generally efficient marketplace are being created (The Economist, 2000). Prior to the advent of the Internet, most economists recognized that they were unlikely to encounter a truly perfect, perfectly competitive, and therefore fully efficient market outside the pages of textbooks. The Internet, however, is being viewed as having precisely this potential.
Economics is defined as a science of efficiency in the use of scarce resources (McConnell, 1988). Economic efficiency is concerned with inputs and outputs -- the relationship between the units of scarce resources that are put into the production process and the resulting outputs of some desired product. Generally, economic efficiency is achieved when full employment and full production are realized, and when an optimum product-mix is established.
Economists regard an "efficient market" as one that is characterized by pure - or nearly perfect -- competition (Gwartney & Stroup, 1990). In an ideal and efficient market, costs of production are minimized and profit maximizing producers produce the goods that consumers desire most. In the purely competitive market, the "iron hand" of which Adam Smith spoke is seen as doing its job well. The actions of producers who are motivated purely by the desire to make a profit are the same as if they cared about the efficient satisfaction of consumer needs. An incredibly complex array of consumer desires, production possibilities, and resource availabilities can be optimally coordinated in the model (Gwartney & Stroup, 1990). Competition is seen as motivating producers to produce efficiently, and rewards those who produce what consumers desire most urgently (relative to costs of production). Competitive forces are consistent with economic efficiency, an...