second fundamental theorem of welfare economics

E535938

theorem in economics welfare economics theorem

The second fundamental theorem of welfare economics states that, under certain ideal conditions, any Pareto efficient allocation of resources can be achieved as a competitive market equilibrium given an appropriate redistribution of initial endowments.

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Observed surface forms (1)

Surface form	Occurrences
second welfare theorem	1

Statements (47)

Predicate	Object
instanceOf	theorem in economics ⓘ welfare economics theorem ⓘ
appliesTo	exchange economies ⓘ production economies ⓘ
associatedWith	Gérard Debreu NERFINISHED ⓘ Kenneth Arrow NERFINISHED ⓘ Lionel McKenzie NERFINISHED ⓘ
assumes	complete markets ⓘ convex preferences ⓘ convex production sets ⓘ feasible allocation of resources ⓘ local non-satiation of preferences ⓘ no externalities ⓘ no public goods ⓘ perfect competition ⓘ perfect information ⓘ price-taking behavior ⓘ
assumptionType	idealized conditions rarely fully satisfied in real economies ⓘ
conclusion	any Pareto efficient allocation can be supported by some system of prices and lump-sum transfers ⓘ efficiency and equity can be separated under ideal conditions ⓘ
contrastsWith	first fundamental theorem of welfare economics, which goes from competitive equilibrium to Pareto efficiency ⓘ
directionOfResult	from Pareto efficient allocation to competitive equilibrium with transfers ⓘ
field	microeconomics ⓘ welfare economics NERFINISHED ⓘ
historicalContext	developed in the 20th century within general equilibrium theory ⓘ
implies	distributional objectives can be achieved via lump-sum redistribution followed by competitive markets ⓘ government can in principle use lump-sum transfers to reach any Pareto efficient allocation ⓘ
involvesConcept	Edgeworth box NERFINISHED ⓘ Pareto efficiency NERFINISHED ⓘ competitive equilibrium ⓘ contract curve ⓘ general equilibrium ⓘ initial endowments ⓘ lump-sum transfers ⓘ
limitation	fails under non-convexities such as increasing returns to scale ⓘ fails with asymmetric information ⓘ fails with incomplete markets ⓘ requires lump-sum transfers that are typically infeasible in practice ⓘ
mathematicalTool	fixed-point theorems ⓘ separating hyperplane theorem NERFINISHED ⓘ
relatedTo	first fundamental theorem of welfare economics NERFINISHED ⓘ
requires	existence of supporting price hyperplanes to convex sets ⓘ
states	any Pareto efficient allocation can be decentralized as a competitive equilibrium given suitable lump-sum transfers of initial endowments ⓘ
teaches	efficiency properties of markets can be separated from distributional choices under strong assumptions ⓘ
usedIn	normative economics ⓘ policy analysis ⓘ public economics ⓘ

Referenced by (2)

Full triples — surface form annotated when it differs from this entity's canonical label.

Pareto efficiency → relatedConcept → second fundamental theorem of welfare economics ⓘ

Walrasian market-clearing framework → relatedConcept → second fundamental theorem of welfare economics ⓘ

this entity surface form: second welfare theorem