Economy

The Two Welfare Theorems: Distribution Through Quantity

The two welfare theorems show that equilibrium implies optimality, and any optimal outcome can be achieved as equilibrium through redistribution. This supports quantity-based policies over price manipulation, yet governments often choose the latter, undermining efficiency.

, and KC Law (Economist)

July 2, 2025 . 1:04 PM

2 min read

The first welfare theorem discussed three weeks ago states that Pareto optimality emerges under Walrasian equilibrium. To recap, one crucial aspect of equilibrium is that individual i's preference ordering over commodity bundle x can be expressed through its value: x'ᵢ ≻ xᵢ ⟹ p · x'ᵢ > p · xᵢ. This first establishes that the analysis can be quantified. The second crucial aspect requires exhausting all available endowments ω, meaning ∑xᵢ = ∑ωᵢ.