The significance of the First 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 First Fundamental Theorem of Welfare Economics states that the competitive equilibrium is Pareto-efficient, meaning that it maximizes overall welfare in the economy even without any intervention or regulation. This is because the decentralized decisions of individual households and firms lead to an allocation of resources that exploits all mutually beneficial gains from trade or reallocation of inputs. Therefore, choice C is the correct answer. Choices A, B, and D are all incorrect because they either suggest the need for intervention in a competitive equilibrium or address different aspects of economic management unrelated to the theorem. The First Fundamental Theorem of Welfare Economics states that a competitive equilibrium will be Pareto efficient, meaning that it will exploit all possible mutually beneficial gains from trade or from reallocation of inputs, even though households and firms behave independently and each pursues its own self-interest. Therefore, option C is the correct answer. Option A is incorrect because the theorem shows that intervention is not required for efficiency in a competitive general equilibrium. Option B is incorrect because while it is possible for an economically efficient outcome to coincide with equitable distribution of utilities, the theorem does not address equity concerns. Option D is incorrect because the theorem is not concerned with the long-term management of resources.

The Significance of the First Fundamental Theorem of Welfare Economics