Economic Policy In A Second-Best Environment

The article begins by summarizing the arguments that lie behind the use of first-best models and notes the inappropriateness of using these results in what is patently a second-best world. Using several well-known examples from the literature, it is claimed, that if second-best considerations are taken seriously, then it is much more difficult, if not impossible, to divorce efficiency from equity than one might have thought from the use of first-best economic models. From this it follows that policy recommendations require us to make and use interpersonal comparisons of utility and that we should do this as well as we can (even if it is not scientific). (This abstract was borrowed from another version of this item.)