Answer to Question #133031 in Microeconomics for Avishal

Question

What is the first fundamental theorem of welfare economics and what is the significance of it?

Answer 1

The first fundamental theorem of welfare economic states “any competitive equilibrium leads to pareto efficient allocation of resources.” This means no further exchange makes one person better off without making worst off. Market leads to social optimum and no intervention of government will be required in this case. This theorem is also known as Invisible Hand Theorem.

This theory is important because it allows for separation of efficiency and efficient allocation of resources in short run.