Working Paper: NBER ID: w3641
Authors: Joseph E. Stiglitz
Abstract: This paper reviews and puts into perspective recent work reassessing the first and second Fundamental Theorems of Welfare Economics. It assesses the implications of the Greenwald-Stiglitz theorem establishing the (constrained) Pareto inefficiency of market economies with imperfect information and incomplete markets as well as recent work on endogenous technological change. The information theoretic limitations to the Second Fundamental Theorem are also discussed, including the inability to separate out issues of equity and efficiency. The final sections of the paper consider the consequences of these problems for economic organization, economic policy, and the role of ideology in the belief in the Invisible Hand.
Keywords: Welfare Economics; Market Failures; Pareto Efficiency; Information Economics
JEL Codes: D63; H21; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperfect information and incomplete markets (D52) | constrained Pareto inefficiency (D61) |
| conditions of market functioning (D41) | efficiency (D61) |
| government intervention (initial redistributions) (P26) | market efficiency (Pareto efficiency) (D61) |