What determines the allocative efficiency of markets? Why are double a
uctions, even with untrained human traders, allocationally efficient?
We provide a simple explanation for these complex phenomena by showing
how externally observable rules that define a market cause high alloc
ative efficiency when individuals remain within the confines of these
rules. We also show how the oft-ignored shape of extramarginal demand
and supply affects efficiency by influencing the inverse relationship
between the magnitude of efficiency loss and its probability.