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Reflections on the general theory of second best at its golden jubilee

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  • Richard Lipsey

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Abstract

The origin of the second best article is described and criticisms assessed. Distortions making impossible the achievement of either first or second best optima are outlined. Attempts to establish the applicability of first best rules are criticised, as are general rules for making piecemeal efficiency improvements. Both often use models containing empirically invalid assumptions and a selected few of the full set of distortions. Practical policy advice requires more parochial objective functions than community welfare; must rely on formal and appreciative theory, empirical evidence, and large doses of judgment; and should concentrate on making piecemeal improvements in context-specific situations. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s10797-007-9036-x
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 14 (2007)
Issue (Month): 4 (August)
Pages: 349-364

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Handle: RePEc:kap:itaxpf:v:14:y:2007:i:4:p:349-364

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Second best; Piecemeal policies; Context-specific policies; Distortions; Efficiency conditions; Optimality conditions; D60;

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References

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  1. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  2. Faith, Roger L & Thompson, Earl A, 1981. "A Paradox in the Theory of Second Best," Economic Inquiry, Western Economic Association International, vol. 19(2), pages 235-44, April.
  3. Robin W. Boadway, 1994. "The Role of Second-Best Theory in Public Economics," Working Papers 910, Queen's University, Department of Economics.
  4. Eaton, B Curtis & Lipsey, Richard G, 1978. "Freedom of Entry and the Existence of Pure Profit," Economic Journal, Royal Economic Society, vol. 88(351), pages 455-69, September.
  5. McKee, Michael & West, Edwin G, 1981. "The Theory of Second Best: A Solution in Search of a Problem," Economic Inquiry, Western Economic Association International, vol. 19(3), pages 436-48, July.
  6. Hatta, Tatsuo, 1986. "Welfare effects of changing commodity tax rates toward uniformity," Journal of Public Economics, Elsevier, vol. 29(1), pages 99-112, February.
  7. Robin Boadway, 1997. "Public Economics and the Theory of Public Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 753-72, November.
  8. Lipsey, Richard G. & Carlaw, Kenneth I. & Bekar, Clifford T., 2005. "Economic Transformations: General Purpose Technologies and Long-Term Economic Growth," OUP Catalogue, Oxford University Press, number 9780199290895.
  9. Eaton, B Curtis & Lipsey, Richard G, 1976. "The Non-Uniqueness of Equilibrium in the Loschian Location Model," American Economic Review, American Economic Association, vol. 66(1), pages 71-93, March.
  10. Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier.
  11. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-97, September.
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Citations

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Cited by:
  1. Richard G. Lipsey, 2012. "A critique of Ng's third-best theory," Discussion Papers dp12-02, Department of Economics, Simon Fraser University.
  2. Ugur, Mehmet, 2009. "Liberalisation in a world of second best: evidence on European network industries," MPRA Paper 17873, University Library of Munich, Germany, revised 13 Oct 2009.
  3. Richard Lipsey & Murray Smith, 2010. "Multilateral Versus Regional Trading Arrangements: Substitutes Or Compliments?," Discussion Papers dp10-03, Department of Economics, Simon Fraser University.

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