Economics • Economic BasicsHard
In welfare economics, what does the 'Second Welfare Theorem' state?
A. Any Pareto-efficient resource allocation can be achieved through a competitive market mechanism, provided appropriate lump-sum transfers are initially made.✓ Correct Answer
B. Competitive markets always lead to a socially optimal distribution of income without government intervention.
C. If all consumers have identical preferences, market equilibria will automatically maximize aggregate social welfare.
D. Monopolistic competition is inherently superior to perfect competition in generating technological innovation.
💡 Solution & Explanation
The Second Welfare Theorem states that any Pareto-efficient resource allocation can be achieved through a competitive market mechanism, provided that appropriate lump-sum wealth transfers are executed beforehand. Alternative choices misstate the theorem by assuming free markets naturally ensure equity without any initial redistribution of endowments. This theorem provides a theoretical bridge between efficiency and equity in welfare economics.
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