Second Fundamental Theorem of Welfare Economics

Cards (3)

  • Any Pareto optimal allocation = can be achieved by trading in competitive markets provided that endowments are first appropriately rearranged among the consumers
  • If preferences are monotonic, convex and continuous = for every Pareto optimal allocation, that exists an initial endowment such that that allocation is an equilibrium
  • Changing endowments may not be easy = need to change what people get without distorting prices; no income or sales tax