First Fundamental Theorem of Welfare Economics The first fundamental theorem of welfare economics states that a society's welfare, measured by life satisfac...
First Fundamental Theorem of Welfare Economics
The first fundamental theorem of welfare economics states that a society's welfare, measured by life satisfaction, is increasing if and only if the marginal rate of welfare (MRW) is negative. In other words, as individuals have more of a good, their willingness to trade it away decreases.
Second Fundamental Theorem of Welfare Economics
The second fundamental theorem of welfare economics states that the MRW is equal to the rate of social welfare (SW) divided by the social cost of producing that welfare. In other words, welfare is efficient if and only if the market price of the good is equal to the social cost of producing that welfare.
Implications of the First and Second Fundamental Theorems
The first and second fundamental theorems have important implications for welfare economics. First, welfare should be increased if and only if the MRW is negative. Second, welfare is efficient if and only if the market price of the good is equal to the social cost of producing that welfare