What are the assumptions on which the first fundamental theorem of welfare economics results?
The first Fundamental theorem of Welfare Economics is based on two assumptions: In the economy, all commodities are competitive. The equilibrium in the economy is Pareto efficient. There is market for all commodities.
What are the assumptions on which first fundamental theorem of welfare economics rests?
First Fundamental Theorem of Welfare Economics: Assume that all individuals and firms are self-interested price takers. Then a competitive equilibrium is Pareto optimal. To illustrate the theorem, we focus on one simple version of it, set in a pure production economy.
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 the conditions needed to achieve the fundamental theorem of welfare economics?
The optimality condition for production is equivalent to the pair of requirements that (i) price should equal marginal cost and (ii) output should be maximised subject to (i).
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.
Is the first economist to come up with positive criteria to explain the increase or decrease in a particular welfare?
The concept of social welfare function was first introduced by Prof. Bergson and later on developed by Samuelson, Tintner and Arrow. They are of the view that no meaningful propositions can be made in welfare economics without introducing value judgments.