Economics • Economic BasicsHard
In welfare economics, what does 'Arrow's Impossibility Theorem' demonstrate?
A. It is impossible to achieve Pareto efficiency in a competitive market.
B. No voting system can convert individual preferences into a collective decision while satisfying a set of seemingly reasonable criteria simultaneously.✓ Correct Answer
C. Welfare maximization always leads to unequal wealth distribution.
D. Monopolies can never be regulated efficiently by a central authority.
💡 Solution & Explanation
Arrow's Impossibility Theorem demonstrates mathematically that no social choice voting rule can transform individual preference rankings into a collective preference order while simultaneously satisfying basic fairness criteria like non-dictatorship and Pareto efficiency. Kenneth Arrow formulated this foundational theorem in his 1951 monograph on social choice. It highlights the inherent structural challenges of designing perfectly democratic aggregation systems.
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