IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Role of Second-Best Theory in Public Economics

  • Robin W. Boadway

This paper surveys the evolution of the use of the theory of second best in public economics. It argues that much of modern normative public economics can be interpreted as simply applied second-best analysis. The original theory of second best as expounded by Lipsey and Lancaster involved analyzing policy in a single-consumer economy with a fixed distortion, and was especially interested in whether marginal cost pricing, or piece-meal prescriptions, could still be maintained. That analysis was subsequently extended to multi-household economies, to multi-distortion cases and to dynamic settings, and became the basis for the optimal tax revolution in public economics. However, more significantly, in the wake of optimal tax analysis and duality theory, the second-best distortion has effectively been made endogenous; and the general government policy problem has been posed as a principal-agent one. The most common method is by assuming non-observability of some important household characteristic or behavioral outcome. As a consequence of these developments, most public policy problems can be viewed as special applications of second-best analysis. For example, the general problem of the efficiency-equity trade-off (the `optimal income tax' problem) and the limit to redistribution can be viewed as second-best problems. A couple of the interesting features of viewing policy problems as second-best problems are as follows. For one, simple policy prescriptions no longer become possible. For another, seemingly odd types of policies, such as quantity restrictions, in-kind transfers and public provision of social insurance become `efficient' policy instruments in certain circumstances. The literature also stresses that second-best policies are typically time-inconsistent. In the face of this, standard second-best optima cannot be attained. Optimal time-consistent policies can also include unusual policy instruments that would otherwise be ruled out in a second-best setting.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_910.pdf
File Function: First version 1994
Download Restriction: no

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 910.

as
in new window

Length: 35 pages
Date of creation: Nov 1994
Date of revision:
Handle: RePEc:qed:wpaper:910
Contact details of provider: Postal: Kingston, Ontario, K7L 3N6
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is featured on the following reading lists or Wikipedia pages:

  1. Teoría del Segundo Mejor in Wikipedia Spanish ne '')

When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:910. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.