What does the 1st welfare theorem tell us what are the central assumptions for it to hold?

-First fundamental theorem of welfare economics (also known as the “Invisible Hand Theorem”): any competitive equilibrium leads to a Pareto efficient allocation of resources. The main idea here is that markets lead to social optimum.

What are the assumptions of welfare economics?

Welfare economics depends heavily on assumptions regarding the measurability and comparability of human welfare across individuals and the value of other ethical and philosophical ideas about well-being.

What are fundamental welfare theorems?

Modern welfare economics is formally summed up in two so-called funda- mental theorems. The first fundamental theorem states that, subject to cer- tain exceptions—such as externalities, public goods, economies of scale, and imperfect information—every competitive equilibrium is Pareto- optimal.

What are key differences between the first and the second fundamental theorems of welfare economics?

The first welfare theorem says a competitive equilibrium is Pareto effi cient: markets can yield effi cient allocations. The second welfare theorem says that any Pareto effi cient allocation can be obtained as an equilibrium provided one makes the ‘right’adjustment to income. Both theorems rule out externalities.

What are the conditions of welfare optimum?

This condition states that the marginal rate of transformation between any factor and any product must be the same for any pair of firms using the factor and producing the product”. It means that the marginal productivity of any factor in producing a particular product must be the same for all the firms.