StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

First Fundamental Theorem of Welfare Economics - Essay Example

Comments (0) Cite this document
Summary
First Fundamental Theorem of Welfare Economics 1. The first fundamental theorem of welfare economics is simply a restatement of Adam Smith’s theory in economics. Adam Smith’s “invisible hand” theory postulates that in competitive markets, there is finally efficient allocation of resources and the first fundamental theory states that relates competitive equilibrium in the market and Pareto optimality…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER98.1% of users find it useful
First Fundamental Theorem of Welfare Economics
Read TextPreview

Extract of sample "First Fundamental Theorem of Welfare Economics"

Download file to see previous pages The third condition for competitive equilibrium is that the allocation maximizes the profit of each firm at the given price system. A simple proof of the theorem is shown in the following notation. Proof of the first fundamental theorem of welfare economics Let [(x0i), (y0j), (Ф)] be a competitive equilibrium, and under the condition of non-satiation, for each: i, ui(x) = ui (x0i)……… eqn. 1 implies Ф (x) ? Ф (x0i). Instead, if we denote this as: ui(x) = ui (x0i), and Ф (x)< Ф (x0i). by the local non-satiation condition, it is possible to let {Xn} be a sequence in Xi converging to x such that ui(xn)> ui(x)= ui (x0i), 1, 2, …… Since Ф is continuous, this condition implies that, for a big n, Ф (xn)< Ф (x0i). However, by the second condition in the definition of competitive equilibrium, ui(xn) > ui (x0i), implies that Ф (xn)>Ф (x0i). Therefore, the contradiction implies that eqn. 1 is true. Using this contradiction, we can suppose that the initial allocation [(x0i), (y0j), (Ф)] is not Pareto optimal, which implies that there is another allocation of resources [(x’i), (y’j)] such that ui(x’i) > ui (x0i). this condition holds for all i with strict inequality for some i. Employing the second condition in the definition of competitive equilibrium, gives that for some instances of i, ui(x’i) > ui (x0i) gives the implication that Ф (x’i)> Ф (x0i). From eqn. 1 and the linearity of Ф, it can be seen that k?i, where ui(x’k) > uk (x0k), ?k Ф(x’k) ??k Ф(x0i). For l?k, where ul(x’l)> ul(x0l), ?l Ф(x)> ?l Ф(x0i). Finding the sum of the equations across all i; , which contradicts the third condition of competitive equilibrium. 2. The theorem proved above is mathematically true; however, some drawbacks are associated with it, for example, when public goods and externalities are introduced. This is because the theorem assumes that in the economy, there are no public goods or externalities (Jehle and Reny, 2001). This means that the theorem will not hold in an exchange economy where an individual’s utility depends on another individual’s consumption as well as the original individual’s consumption. Also, the theorem does not hold if the production possibility set of one firm in an exchange economy depends on the production set of another firm in the same economy. The presence of externalities and public good sin the market will cause market failure iof they are not corrected, since there are no markets for these goods. 3. The above proposition can be proved by the following example, where externalities and public goods are introduced into an economy. In this case, an externality is used to mean the situation where the actions of an individual or firm affects the actions of another individual or firm other than through the effect on prices (Jehle and Reny, 2001). For example, one production firm could be increasing the costs of production for another firm by the production of smoke, which forces the other firm to increase costs. One factory could be producing electronic gadgets, a process which requires the emission of smoke. The factory could be located upwind, meaning that the smoke emitted harm another ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“First Fundamental Theorem of Welfare Economics Essay”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1438509-state-and-prove-the-first-fundamental-theorem-of
(First Fundamental Theorem of Welfare Economics Essay)
https://studentshare.org/macro-microeconomics/1438509-state-and-prove-the-first-fundamental-theorem-of.
“First Fundamental Theorem of Welfare Economics Essay”, n.d. https://studentshare.org/macro-microeconomics/1438509-state-and-prove-the-first-fundamental-theorem-of.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF First Fundamental Theorem of Welfare Economics

Welfare to Work and Social Policy: Comparative Study of Various Nations' Approaches

The social policy varies differently by the needs of individual nations and can include assistance to youth unemployment in an attempt to provide temporary aid until an individual is able to sustain a regular income through work incentives. One of the main theories regarding welfare to work programs is that working parents contribute to the economy and are less likely to rely solely on the state for their welfare (Walling, 2005). With this concept being one of the primary motivators for welfare to work policies, different nations adopt a policy to provide an allotment of skills training, aid with transportation issues, financial support, and even child care as an incentive to drive the welfare recipient back into full-time work. T...
9 Pages(2250 words)Report

International Business Economics

According to Adam Smith, the absolute advantage would be realised as long as the cost of production differed from between countries, one or both countries would gain by trading. An example to illustrate this is a situation where we have two countries A and B which produce two similar goods X and Y. The figures show labour cost in hours for producing one unit of a good

David Ricardo formulated the theory of comparative advantage and argued that even if one country is more productive in both lines of production it would be still profitable to trade. Country A is more productive in both lines of production but it will still be profitable to trade with country B, this is shown by first stating that country A is more advanta...
6 Pages(1500 words)Assignment

Business Economics: Small and Medium

The entry of small firms into the global markets has proven to be the main aspect of the creation of economies of scale. Markets are fast evolving to the needs of varied tastes and customer preferences, so necessary knowledge and technology asset has a major role to play for small firms to rise and to match up to the situation. However, small firms are characterized by “smallness of the market share (a large number of similar-sized firms) and hence lack of individual market power, corresponding to the theoretical concept of Pure Competition.” (Waite 1973. P. 154).

They need to overcome the handicap of smallness by strategic alliances and mergers with larger or technically more competent entities. Small firms...
10 Pages(2500 words)Assignment

Putins Foreign Policy Changes during His First Presidential Term

Our world, since its ‘origination’ has been a ‘hotbed’ of activity. Activity in the sense, we humans have been showing activeness both mentally and physically, which have transformed our globe from a primitive one to an advanced one. The activities are normally carried out by humans, organizing or segregating themselves into different countries or nations. It is common knowledge that for a country to reach the top echelons, its leader has to be very capable and strong. That is, a capable and strong leader will only be able to provide a better life and future for his/her country and its citizens. From time immemorial, the success or failure of a country depends on the role, the leader plays. The leader is th...
82 Pages(20500 words)Dissertation

Issues in Applied Economics

A major issue then, becomes the convincing obligation by the polity not to abuse its force. Because institutions are planned by people with different bargaining powers and not for sake of effectiveness, some models may be less competent than others and due to path dependency, may continue for a long time, resulting in sluggish economy. The shortage of realistic commitment by the state not to suitable property human rights accounts for the incompetent institutions that have developed in different countries. To humor, such situation provides disincentives to investment in socially profitable enterprises, and generates groups with vested interests in preserving the status quo constraints.

Institutions present the fundament...
6 Pages(1500 words)Term Paper

Fundamental Difference between a Partnership, a LLP and a Private Limited Company

An unqualified form of partnership places the entire burden of business liability on the partners of the firm. On the other Limited Liability Partnership (LLP) and a Private Limited Company do not impose as much liability as the Partnership does.  

An LLP is almost similar to a standard form of a partnership without unlimited liabilities on the partners. Partners’ liabilities are differently prescribed in that liability caused by any error of one partner need not affect the other partners. State registration is required but some of the states stipulate that partners should take liability insurance or has adequate assets to meet likely claims. This is very much applicable to firms of professionals like account...
13 Pages(3250 words)Term Paper

Economics or Ethics

Several CEOs in America have in coalition with top managers deviated from the norms of corporate governance and caused immeasurable woes to the stakeholders. Using their power and ego they chased the wealth for personal gains without any concern for the shareholders or other stakeholders of the company. Enron, the world’s largest energy trader at one time, had to file bankruptcy under Chapter 11 when about 5000 workers lost their job (Bhattacharya, 2004). Arthur Anderson, one of the big five auditing firms was charged to have colluded with the management to misappropriate funds and project a picture different from the reality. Income was inflated and then all concerned papers were destroyed. The leadership at Enron was conce...
6 Pages(1500 words)Assignment

Managerial Economics and Business Environment

Once the above said subject matter is clearly sorted out, the next emphasis would be on the concepts like the opportunity costing, incremental principle, marginal principle, discounting principle, the principle of time perspective, and calculation of economic profit as the guidelines to the scope of managerial economics. (Surender. V, 2008).
To start with, we consider a firm for which different processes have to be carried to achieve its objectives of profit maximization (assuming that all the organizations work with the view to maximize profits). If firms from different sectors are identified simultaneously, then the working of the economy as a whole could also be analyzed which in turn is useful in the decision-making proce...
15 Pages(3750 words)Assignment

Gross Domestic Product and the Nations Competency in Terms of Economic Welfare

It is often used to compare the economic performance to aid as a prediction tool and to analyze the business cycles and the recessive and expansive economic performances within them. This further aid economic and fiscal policy formulation of the government and is also used to analyze the consumer behavior and the economic phenomena involved. (Heakal, R. 2008).These figures can be a benchmark to compare economies of different nations and the economic prediction process is also made possible.

A usual pattern of assessing the Gross Domestic Product is to have an initial GDP report on every quarter which is an advance report. Two corrective reports follow this before the final figures on GDP are arrived at. It usually takes...
7 Pages(1750 words)Report

Comparative Review of Welfare System

In order to compare the welfare system of the three proposed countries, it is important to first develop a comparative method that would guide in comparing the three states. For the purpose of this paper, a binary comparison would be conducted. The implicit comparison would deal with Britain while the explicit comparison would explore the USA and Canada. Thereby a small N’ study would be used, that is, of three countries.
The three countries selected to share a similarity in the form that these countries are a welfare state. This is when welfare is mainly funded by the state. While the USA and Canada focus on the liberal welfare state, the welfare state of the UK is not quite defined.
The comparison of the welfare...
8 Pages(2000 words)Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic First Fundamental Theorem of Welfare Economics for FREE!

Contact Us