Question

two fundamental theorems of welfare economics describe their relationship between competitive markets and Pareto efficiency.

Answer 1

1. Invisible hand theorem- it states that market itself leads to social optimal outcome and no government intervention is needed. Here only 'laissez faire ' policy could be adopted. Any competitive equilibrium leads to pareto efficient allocation of resources.

2. The second theory states that if all consumers have convex preference and all firms have convex production possibility curve, then pareto efficient allocation of resources can be achieved. However, competitive equilibrium in this market is suitable for redistribution of initial endowments.