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fundamental theorems of welfare


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The two theorems that describe the efficiency properties of a competitive equilibrium. The First Fundamental Theorem of Welfare Economics states that (in the absence of any market failure) a competitive equilibrium is Pareto efficient. The Second Fundamental Theorem of Welfare Economics states that if every consumer has convex preferences and every firm has a convex production set then any Pareto-efficient allocation can be decentralized as a competitive equilibrium.

Subjects: Economics.


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