The Welfare Theorem

The Welfare Theorem consists of two main ideas in economics. The First Welfare Theorem states that in a competitive market, if there are no external influences like taxes or monopolies, the allocation of resources can be efficient—meaning everyone gets the best possible outcome given their preferences and resources. The Second Welfare Theorem suggests that any efficient outcome can be achieved through some initial distribution of resources. Together, these theorems highlight the power of free markets while also suggesting that fairness can be improved through smart initial resource distributions.