Question

Which of the following is true about competitive equilibria in environments where the conditions of the first welfare theorem are satisfied?

Options:
Option 1: Markets experience perfect competition.
Option 2: There is an absence of market failures.
Option 3: The equilibrium is inefficient.
Option 4: The government intervenes extensively.

Answer 1

In environments where the conditions of the first welfare theorem are satisfied, the competitive equilibrium is efficient and there is an absence of market failures.

Step-by-step explanation:

In environments where the conditions of the first welfare theorem are satisfied, the competitive equilibrium is efficient and there is an absence of market failures.

Option 1: Markets experience perfect competition - This is true as the first welfare theorem assumes perfect competition in the markets.

Option 2: There is an absence of market failures - This is true as the first welfare theorem assumes that the market satisfies all four conditions, including the absence of market failures.

Option 3: The equilibrium is inefficient - This is not true as the competitive equilibrium in these environments is efficient and allocates resources to their best alternative use.

Option 4: The government intervenes extensively - This is not true as the first welfare theorem assumes a free market economy without extensive government intervention.