Final answer:
The highest level of market efficiency with the use of inside information is semi-strong form efficiency, but actual practice reflects that markets are not completely efficient. Market prices efficiently convey information about scarcity, but allocative and productive efficiency might not be achieved due to factors like income inequality.
Step-by-step explanation:
If inside information may be used to earn abnormal returns, then the highest level of efficiency that market can be operating with is 'semi-strong form efficiency'. However, if inside information is indeed being used, it suggests that the market is not fully informationally efficient.
The concept of market efficiency is related to how well market prices reflect all available information. The market system as an efficient mechanism for information implies that prices effectively disseminate information about scarcity and thus guide participants to make rational decisions about supply and demand.