As everyone knows, there is a considerable body of formal economic theory that supports the traditional ‘liberal’ belief in the price mechanism as a method of allocating economic resources. Indeed, it has been shown (1) that all competitive equilibria are optimal and (2) that all optimal allocations are competitive equilibria (Arrow, 1951), where by an optimal allocation is meant one such that no one can be made better off without making someone else worse off. A simple interpretation gives the prima facie case for laissez-faire: individuals allowed to trade freely in competitive markets will exhaust the gains from trade.
KeywordsWelfare Economic Optimal Allocation Moral Agent Marginal Rate Competitive Equilibrium
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