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First vs Second Best

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"The theory of the second best leaves welfare economists 'high and dry' since not only does it abolish the established objectives of first-best conditions, but it also gives virtually no clue as to where the second-best position is, or even the appropriate direction of departure from first-best criteria". Discuss.

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Solution Summary

Application of the theory of the second best to economics; discussion of its usefulness.

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This statement is a generalization, and as such you can approach the discussion of it through examples. Certainly there are examples that could both prove this statement, and others that disprove it. But broad generalizations such as this one are easily underminded, because we need find only one example to disprove it.

First, let's think about what the theory of second best implies for economics. Economics is a science based on modelling. By using data drawn from the real world, economists attempt to create ...

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