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Created / Updated 31.05.2019 / 06.06.2019
Licencing Attribution-NonCommercial-NoDerivs (CC BY-NC-ND)     (Unversité de Genève, cours de Pr. Monika Mrazova)
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STWE: Can a Pareto efficient allocation be achieved as a competitive equilibrium?

Yes, if preferences are convex

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FTWE does not hold in 

the presence of externalities

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FTWE focuses on efficiency, not fairness

Allocation where one person owns everything is Pareto efficient

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The FTWE tells us that

the resulting equilibrium from these independent, self-interested and decentralised actions is efficient

This is the nature of the “Invisible Hand” of Adam Smith

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Implicit assumptions of the FTWE: Each consumer knows only

his own tastes, endowment and the market prices

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any competitive equilibrium is Pareto efficient

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Using Walras’ Law we can show that 

if demand equals supply in one market, the same must be true in the other market.