APPROPRIATION AND EFFICIENCY - A REVISION OF THE FIRST THEOREM OF WELFARE ECONOMICS

The First Theorem of Welfare Economics rests on the assumption that in dividuals have neither price-making nor market-making capacities. We o ffer a revision in which individuals have such capacities. The revisio n emphasizes two keys for market efficiency: (i) the need to align pri vate rewards with social contributions- called full appropriation and (ii) the need for an assumption to counter the possibility of coordina tion failures in the choice of produced commodities - called noncomple mentarity. We also emphasize that information about prices of unmarket ed commodities involves decentralized knowledge available only to prod uct innovators and that pecuniary externalities are important potentia l sources of market failure.