The significance of the Second Fundamental Theorem of Welfare Economics is that:
A)even if the economy is in competitive general equilibrium, significant intervention will be required to bring about economic efficiency.
B)there is a possibility that an economy could simultaneously attain an efficient allocation and one in which the resulting distribution of utility is in some sense equitable.
C)Even though households and firms behave independently and each pursues its own self-interest, the resulting equilibrium is efficient in the sense that it exploits all possible mutually beneficial gains from trade or from reallocation of inputs.
D)resources are scarce in the economy and so must be managed for the long term.

Question

Quizplus · Accepted Answer

The Second Fundamental Theorem of Welfare Economics states that any Pareto-efficient allocation can be achieved as a competitive equilibrium from some initial endowment through some lump-sum redistribution of that endowment. This means that it is possible to achieve both economic efficiency and equity through appropriate redistribution policies. The Second Fundamental Theorem of Welfare Economics states that any efficient allocation can be achieved through a competitive equilibrium, given lump sum transfers among the agents in the economy. This means that it is possible to achieve both efficiency and equity in the distribution of utility. Therefore, option B is the best choice. Option A is incorrect because significant intervention may not be required if the economy is already in a competitive general equilibrium. Option C is incorrect because the resulting equilibrium may not be efficient if there are market failures or externalities. Option D is unrelated to the Second Fundamental Theorem of Welfare Economics.

The Significance of the Second Fundamental Theorem of Welfare Economics