First Welfare Theorem under Pure Exchange

Suppose (XA , XB , YA , YB ) is a competitive equilibrium but that it is not a

Pareto efficient allocation.
³ ´ This means that there must exist another bundle
0 0 0 0
XA , XB , YA , YB inside the Edgeworth Box which makes at least one of the
individuals better off without reducing the utility of the other. In other words
it must be the³ case that:
´
0 0
A prefers XA , YA to (XA , YA ) strictly and B is either indifferent between
³ 0 0
´ ³ 0 0
´ 0 0
(XB , YB ) and XB , YB or prefers XB , YB strictly, and XA + XB ≤ X and
0 0
YA + YB ≤ Y . However, we know that (XA , YA ) are the solution to the utility
maximization problem of individual A given his endowments. Therefore, the
bundle individual A prefers strictly to the solution of his maximization problem
must not be feasible for him given his endowments, i.e.:
0 0 e e
pX XA + pY YA > pX XA + pY YA
By a similar argument, the bundle that B prefers weakly to the solution of
his maximization problem could not be "cheaper" than that solution, i.e.:
0 0 e e
pX XB + pY YB > pX XB + pY YB
Adding
³ 0 these0 two
´ inequalities
³ 0 will
´ give ¡us: e
0 e ¢ ¡ e e¢
pX XA + XB + pY YA + YB > pX XA + XB + pY YA + YB
³ 0 0 0 0
´
But this contradicts the initial assumption that XA , XB , YA , YB is feasible,
0 0 0 0
i.e. that XA + XB ≤ X and YA + YB ≤ Y . Q.E.D.