... with the "social desirability of alternative economic states"2. The Fundamental Theorems of Welfare Economics link the concepts of competitive equilibrium and Pareto-optimal allocation. From the First Fundamental Theorem of Welfare Economics we know that, in a market economy where producers and consumers are all price takers, any competitive equilibrium is Pareto optimal, in that markets clear, consumers maximise utility and firms maximise profits3. There are no externalities and the price mechanism is the best way to determine demand and supply. The Second Fundamental Welfare Theorem goes further, to state that any Pareto-optimal allocation can be achieved as a competitive equilibrium, provided there is an appropriate redistribution of initial endowments4 (and through optimising behaviour on the part of society). These two theorems imply that efficiency can be dealt with separately from equity; if a particular distribution of welfare is pursued, this should be done by altering the distribution of initial endowments, ...

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