The Course textbook describes the First Fundamental Theorem of Welfare Economics as Adam Smith's theorem of the invisible hand. (You do not need to refer to the textbook to answer this discussion question.) Adam Smith's suggestion that the market activity of self-interested individuals unintentionally leads to beneficial social outcomes has been interpreted by some people as an argument for laissez-faire, the idea that society benefits when governments do not interfere in market processes. I chose the word "interfere," which carries both an implicit value judgement and an explicit statement about what is "natural"; other words might be chosen by someone who still sees a limited role for government in improving market outcomes.

This discussion question assignment is asking you to think about the circumstances and structures that are implicit in the relationship between competitive equilibrium and Pareto efficiency. All models are incomplete by design and by necessity; the General Equilibrium model we discuss is no exception, and within the model, the theorem is proven and therefore "true." But to apply these insights, the basic assumptions not explicitly stated must be made clear also.

The Question: What do you think are the most important assumptions that we did not make explicit in out statement of the First Theorem of Welfare Economics about the economy - its consumers, producers and governments - that are necessary for the theorem to be valid?

It is certainly true that more advanced statements of the theorem will make many of these assumptions clear. But in our treatment, we were less careful. I have hinted at some ideas by referring to the rest of the course, and by choosing the image above. You can certainly think of many more. But I also hope you will go beyond the content of your economics classes and think about your own knowledge of real economies in considering your response. For example, the First Welfare Theorem theorem is true, but Adam Smith lived in the 18th Century in Scotland, and the theorem was proven in 20th Century America. Does this matter? Are there any other hidden things we should consideration?