General Equilibrium

Question 1

The First Welfare Theorem

Answer 1

States that under certain assumptions the competitive equilibrium in an economy will necessarily be Pareto Efficient.

Question 2

The Second Welfare Theorem

Answer 2

Says that any efficient allocation can be a competitive equilibrium, so long as the government can redistribute endowments without shrinking the size of the economy.

Question 3

When does the Second Welfare theorem not hold?

Answer 3

If preferences are non convex

Question 4

Public good

Answer 4

A good which is non-excludable and non-rival. They can be consumed by more than one individual at a time. No one can be prevented from consuming them

Question 5

When does the first welfare theorem breakdown?

Answer 5

When externalities exist

Question 6

Optimal level output level for Public good?

Answer 6

Sum of MB = MC of producing

Question 7

Private optimal level of output for Private good?

Answer 7

MB = MC

Question 8

When do the welfare theorems fall down?

Answer 8

When externalities exist