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Explain how a condition that initially did not satisfy Pareto ends up satisfying Pareto in the...

Explain how a condition that initially did not satisfy Pareto ends up satisfying Pareto in the long run. [Hint: This is the Second Theorem of Welfare Economics]

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Answer #1

The theory of second best implies that when one or more conditions of optimality are not satisfied , then it is essential to have an alternative or next best. The pareto optimal situation can't able to apply when more than one conditions are not satisfied.
Pareto optimality can be achieved only in perfect competition market. The second theorem stares that there will be price set such that the outcome or pareto efficiency is a competitive market equilibrium, provided convex indifference curve.
The second theorem states that the distribution problem and efficiency problem can be separated. Under second theorem, price system used to generate better and efficient outcome. The price must not be used for the purpose of redistribution.the second theorem is more useful and easier to solve allocative efficiency problem than competitive equilibrium.

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