Two states are equivalent if, starting from either one, every possible input sequence produces exactly the same outputs. From the outside you couldn't tell which one the machine started in. That means one of them is redundant.
The practical test:
- The two states must have the same outputs (same Moore output, or the same Mealy output for every input).
- For every input, their next states must be the same, or themselves equivalent.
The quick case: two rows of a state table that are identical (same output, same next state for every input) are equivalent. Merge them into one state, redirect every arrow that pointed at the removed one, and look again: the merge can make other rows identical.
Why bother? Fewer states can mean fewer flip-flops (5 states need 3, 4 need only 2) and simpler logic. Removing equivalent states is called state minimization; an implication table finds all of them systematically.
Two states with different outputs are never equivalent, however similar their arrows look.