Welfare Economics and Public Choice

[...]The analysis of competitive markets culminated in the fundamental theorems of welfare economics which elucidated the (restrictive) conditions under which resource allocation by markets would achieve Pareto efficiency. The first fundamental theorem says that all perfectly competitive equilibria with complete markets (to deal with externalities and uncertainty) are Pareto efficient. The second fundamental theorem says that any Pareto efficient allocation might be decentralized by suitable choice of lump-sum transfers.[...]