Question

The second fundamental theorem of welfare economics says that governments can make markets more equitable (or fair) by transferring a lump sum ($, goods, factors of production) from one party to another. Why would we think that the markets would achieve efficiency after the government “interferes” and transfers between market participants?

Answer 1

Answer:

Fundamental Theorem of Welfare Economics:

There are two fundamental theorems of welfare economics. The first theorem states that a market will tend toward a competitive equilibrium that is weakly Pareto optimal when the market maintains the following two attributes:

1. Complete markets with no transaction costs, and therefore each actor also having perfect information.

2. Price-taking behavior with no monopolists and easy entry and exit from a market.

Furthermore, the first theorem states that the equilibrium will be fully Pareto optimal with the additional condition of:

3. Local nonsatiation of preferences such that for any original bundle of goods, there is another bundle of goods arbitrarily close to the original bundle, but which is preferred.

The second theorem states that out of all possible Pareto optimal outcomes one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over.

Market Partcipant:

The Court has found that the dormant Commerce Clause does not forbid discriminatory action by the state when the state acts as a market participant.48 It has justified this exception to the dormant Commerce Clause both historically 49 -the Clause was not directed at this type of behavior-and politically 50 -its application to the state's participation in the market would cause a variety of harms. Unfortunately, the Court's purpose analysis is superficial, and its supporting justifications are either inapt or insufficiently articulated.