The Fundamental Theorems of Welfare Economics are two foundational results relating competitive markets to economic efficiency. The first theorem states that any equilibrium arising from a complete set of markets under perfect competition, with no externalities and complete information, is Pareto optimal, meaning no one's situation can be improved without making someone else worse off. The second theorem, its converse, states that under suitable convexity assumptions, any Pareto optimal outcome can be achieved as a competitive market equilibrium after an appropriate redistribution of initial resources. Together the two theorems formalize the sense in which competitive markets are efficient, and the conditions under which that efficiency can fail.
Facts
StatementFirst theorem: a competitive equilibrium with complete markets, complete information and perfect competition is Pareto optimal. Second theorem: any Pareto optimum can be supported as a competitive equilibrium for some initial set of endowments. 1 Classification
Statement FormCharacterization Theorem 1 Connections
Sources
1. Fundamental theorems of welfare economics, Wikipedia
Second theorem
any Pareto optimum can be supported as a competitive equilibrium for some initial set of endowments
History
Kenneth Arrow and Gérard Debreu (separately, 1951)
In Group: Economic Theory, Lead paragraph
There are two fundamental theorems of welfare economics.
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