Final answer:
The first fundamental theorem of welfare economics states that a perfectly competitive market will achieve an efficient allocation of resources, while the second theorem states that any Pareto efficient outcome can be achieved through redistribution in a competitive market.
Step-by-step explanation:
The first fundamental theorem of welfare economics states that under certain conditions, a perfectly competitive market will achieve an efficient allocation of resources. This means that in a competitive market with no externalities or market failures, the market equilibrium will be Pareto efficient, where no one can be made better off without making someone else worse off.
The second fundamental theorem of welfare economics states that any Pareto efficient outcome can be achieved through a competitive market with the help of redistribution. This means that by redistributing resources through taxes and transfers, it is possible to achieve any desired distribution of income and still maintain efficiency.
For example, let's say we have a market where the price and quantity are determined by supply and demand. If there are no external costs or benefits, and everyone involved in the market has perfect information, the market will reach an equilibrium where the quantity supplied equals the quantity demanded. This equilibrium is efficient because it maximizes total surplus, which is the sum of consumer surplus and producer surplus.