Question

Why is the First Welfare Theorem such a big deal in a market that is perfectly competitive and has no externalities?

		Because it tells us that the free market gives the greatest amount of surplus possible only for consumers.
		Because it tells us that the free market is efficient even when the government enters and imposes a tax or a subsidy.
		Because it tells us that market equilibrium allocations are Pareto efficient.
		Because it tells us that the free market without intervention is always fair, and any inequality we see in the market must be a result of corruption.
		Because it tells us that the free market gives the greatest amount of surplus possible only for producers.

Answer 1

The correct answer is that it tells us that market equilibrium allocations are Parero efficient.

This is what the first welfare theorem is about. It says that the perfect competition can attain Pareto efficient allocation.

The other options are incorrect because both the consumer as well as producer surplus are maximised in case of perfect competition because the market determines the price level. However, free market can be inefficient in case of tax or subsidy and create dead weight loss. Free markets are not fair. They operate on the principles of demand and supply excluding those who cannot pay for the goods and services.