The use of partial equilibrium models is common and typically, efficiency is characterised by maximising consumer plus producer surplus (or sometimes, gross consumer surplus). The analysis appeals---implicitly or explicitly---to the concept of efficiency derived from general equilibrium models. It is shown---using the tax-reform methodology--- in a simple general equilibrium model that, if the second-best outcome is not the first-best one, the sum of consumer plus producer surplus cannot lead an economy to its true second-best optimum.
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Paper provided by UBC Department of Economics in its series UBC Departmental Archives with number
98-06.
Find related papers by JEL classification: D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement