First Welfare Theorem
From Biocrawler, the free encyclopedia.
In welfare economics, the First Welfare Theorem is that a system of free markets will lead to a Pareto efficient equilibrium. This was first demonstrated mathematically by economists Kenneth Arrow and Gerard Debreu, although the restrictive assumptions necessary for the proof mean that the result may not necessarily reflect the workings of real economies.
A fuller statement of this theorem is available here.
Conditions for the theorem
- Markets exist for all possible goods.
- Markets are perfectly competive.
- Transaction costs are negligible.
- There are no externalities.
Implications of the theorem
Under idealized conditions, the first welfare theorem implies that Pareto efficiency can be obtained with very little government action - the function of government can be restricted that of protecting property rights and allowing trade. Solely by changing the initial distribution of resources, any pareto-efficient outcome can be attained.
