theory of the second best
{{Short description|Branch of economics studying next-best alternatives}}
{{Redirect|Second best|the films|Second Best (1994 film)|and|Second Best (2004 film)}}
In welfare economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.{{Cite book|last=Heath|first=Joseph|url=https://www.worldcat.org/oclc/615371821|title=Filthy lucre : economics for people who hate capitalism|date=2009|publisher=HarperCollins|isbn=978-1-55468-769-5|location=Toronto|oclc=615371821}} The economists Richard Lipsey and Kelvin Lancaster showed in 1956 that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal. Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing one or more additional market distortions in an interdependent market may partially counteract the first, and lead to a more efficient outcome.{{cite web|url=https://www.nytimes.com/2014/06/23/opinion/paul-krugman-conservatives-and-climate-change.html|title=The Big Green Test - Conservatives and Climate Change|date=June 22, 2014|website=The New York Times|last1=Krugman|first1=Paul|author-link1=Paul Krugman|accessdate=27 June 2014}}
Implications
In an economy with some uncorrectable market failure in one sector, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In theory, at least, it may be better to let two market imperfections cancel each other out rather than making an effort to fix either one. Thus, it may be optimal for the government to intervene in a way that is contrary to usual policy. This suggests that economists need to study the details of the situation before jumping to the theory-based conclusion that an improvement in market perfection in one area implies a global improvement in efficiency.{{cite news|title=Making the second best of it|url=https://www.economist.com/blogs/freeexchange/2007/08/making_the_second_best_of_it|accessdate=27 June 2014|work=Free Exchange|publisher=Economist|date=August 21, 2007}}
Application
Even though the theory of the second best was developed for the Walrasian general equilibrium system, it also applies to partial equilibrium cases.{{examples needed|date=March 2025}}
References
External links
- [http://legaltheorylexicon.blogspot.com/2003/11/legal-theory-lexicon-011-second.html Introduction to Second Best in legal theory]
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