The Greenwald-Stiglitz theorem, in economics, shows that an economy with externalities or distortions arising from imperfect information and incomplete markets is generally not constrained Pareto optimal, meaning government interventions such as taxes or subsidies can typically make some participants better off without making others worse off, even after accounting for the same information and market limitations the private economy faces. The result, established by Bruce Greenwald and Joseph Stiglitz, qualifies the reach of the First Fundamental Theorem of Welfare Economics once imperfect information is taken into account.
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StatementThe Greenwald-Stiglitz theorem shows that an economy with externalities or distortions associated with imperfect information and incomplete markets is in general not constrained Pareto optimal, and there exist government interventions such as taxes and subsidies to make a Pareto improvement. 1 Classification
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Sources
1. Greenwald-Stiglitz theorem, Wikipedia
Opening paragraph
The Greenwald-Stiglitz theorem shows that an economy with externalities or distortions associated with imperfect information and incomplete markets is in general not constrained Pareto optimal, and there exist government interventions such as taxes and subsidies to make a Pareto improvement.
References
B. C. Greenwald and J. E. Stiglitz, Externalities with Imperfect Information and Incomplete Markets, The Quarterly Journal of Economics, 101, 229-264 (1986)
In Group: Economic Theory, Lead paragraph
The Greenwald-Stiglitz theorem shows that an economy with externalities or distortions associated with imperfect information and incomplete markets is in general not constrained Pareto optimal, and there exist government interventions such as taxes and subsidies to make a Pareto improvement.
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