What is the (conceptual) difference between a competitive equilibrium and the Pareto optimum?
What is the (conceptual) difference between a competitive equilibrium and the Pareto optimum?
Homework Answers
The results which are important here are the two theorems of welfare.
First Welfare Theorem: Any competitive equilibrium is pareto (so here you have competitive equilibrium that implies pareto optimum).
Second Welfare Theorem: Any optimal allocation of pareto can be achieved as a price equilibrium, given certain assumptions. That is, a set of prices and initial endowments exists which will result in optimal allocation of the desired pareto.
The FWT is immediate. The SWT says that if we have an optimal allocation of the desired pareto, we can build a corresponding competitive equilibrium that will give us that optimal allocation.
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What is the (conceptual) difference between a competitive
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