Abstract
The foundation of the belief in the desirability of competitive markets derives from the impact of competition on economic efficiency. Economic efficiency can be defined in terms of Pareto improvement at three different levels, i.e., efficiency in distribution, efficiency in production and the efficiency in coordination of production and consumption for the whole economy. A feasible allocation vector (x,y) of the consumption vector x = (xi) for each consumer i and a production vector y = (yj) for each producer j is defined to be Pareto efficient (or Pareto optimal) if there is no other feasible allocation which is a Pareto improvement on (x,y). The first basic theorem of welfare economics states that a competitive equilibrium is a Pareto optimum. The second basic theorem states that any Pareto optimum can be realized as a particular competitive equilibrium under fairly general conditions i.e., with each Pareto optimum one can associate a price system and a system of resource ownership which would attain, as a competitive equilibrium, this particular Pareto optimum.
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