Editor’S Introduction To: A Symposium On Second And Third Best Theory: Criticisms And Applications

This paper presents the editor’s introduction and the table of contents for a symposium on Second and Third Best Theory forthcoming in The Pacific Economic Review, 22:2, May 2017. Unusual in such cases, the two editors are the major protagonists in this debate. In the symposium Ng maintains that second-best theory appears to preclude giving theory-based policy advice because full second-best optima cannot be determined in any practical case. Lipsey disagrees and discusses the development of context-specific policies not based on the theory of the optimal allocation of resources. To allow for theory-based policy, Ng offers his theory of third best. The major disagreement over this theory concerns its proposition: first-best rules for third-best worlds under Informational Poverty (not enough is known to determine the desirable direction of change of some the policy variable). Lipsey argues that, if correct, this rule would upset the main result of second-best theory that the sign of the change in the objective function may be either positive or negative when first-best rules are fulfilled piecemeal in second-best worlds. Wo supports Ng’s third best theory and derives additional rules, while Boadway surveys the application of second best theory in several cases from the literature of public economics.