Economics • Economic BasicsHard
In the study of welfare economics, what does 'Arrow's Impossibility Theorem' demonstrate regarding social choice functions?
A. It is impossible to design a voting system that translates individual preferences into a consistent social ranking while satisfying basic democratic fairness criteria✓ Correct Answer
B. Competitive markets can never achieve Pareto efficiency in the presence of public goods and external costs
C. Wealth redistribution policies always reduce total aggregate utility within a utilitarian framework
D. Monopoly pricing inevitably leads to a complete market failure across all industrial sectors
💡 Solution & Explanation
Kenneth Arrow proved mathematically that no rank-order voting system can convert ranked preferences of individuals into a community-wide ranking without violating at least one of criteria such as nondictatorship, Pareto efficiency, or independence of irrelevant alternatives. This theorem forms a foundational pillar of modern public choice theory and political economy. Welfare economics often grapples with these aggregation challenges when evaluating public policy outcomes.
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