The field of welfare economics is associated

with two fundamental theorems. The first

states that given certain assumptions,
competitive markets (price equilibria with
transfers, e.g. Walrasian equilibria)
produce Pareto efficient outcomes. The
assumptions required are generally
characterised as "very weak". More
specifically, the existence of competitive
equilibrium implies both price-
taking behaviour and complete markets, but
the only additional assumption is the local
non-satiation of agents' preferences – that
consumers would like, at the margin, to have
slightly more of any given good. The first
fundamental theorem is said to capture the
logic of Adam Smith's invisible hand, though
in general there is no reason to suppose that
the "best" Pareto efficient point (of which there
are a set) will be selected by the market
without intervention, only that some such point
will be.
The second fundamental theorem states that
given further restrictions, any Pareto efficient
outcome can be supported as a competitive
market equilibrium. These restrictions are
stronger than for the first fundamental
theorem, with convexity of preferences and
production functions a sufficient but not
necessary condition.[5][9] A direct consequence
of the second theorem is that a
benevolent social planner could use a system
of lump sum transfers to ensure that the
"best" Pareto efficient allocation was
supported as a competitive equilibrium for
some set of prices. More generally, it
suggests that redistribution should, if possible,
be achieved without affecting prices (which
should continue to reflect relative scarcity),
thus ensuring that the final (post-trade) result
is efficient. Put into practice, such a policy
might resemble predistribution.
Because of welfare economics' close ties
to social choice theory, Arrow's impossibility
theorem is sometimes listed as a third
fundamental theorem.