International Tax and Public Finance

, Volume 14, Issue 4, pp 349–364 | Cite as

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

Article

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.

Keywords

Second best Piecemeal policies Context-specific policies Distortions Efficiency conditions Optimality conditions 

JEL

D60 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Athanasiou, L. (1966). Some notes on the theory of second best. Oxford Economic Papers, 18(1), 83–87, March. Google Scholar
  2. Atkinson, A. B., & Stiglitz, J. E. (1976). The design of the tax structure: direct versus indirect taxation. Journal of Public Economics, 6, 55–75. CrossRefGoogle Scholar
  3. Baumol, W. J. (2002). The free market innovation machine. Princeton: Princeton University Press. Google Scholar
  4. Bhagwati, J. N. (1971). The generalized theory of distortions and welfare. In J. N. Bhagwati, R. W. Jones, R. Mundell, & J. Vanek (Eds.), Trade, balance of payments and growth: papers in international economics in honor of V. Charles P. Kindleberger (pp. 69–90). Amsterdam: North-Holland. Google Scholar
  5. Bhagwati, J. N., Ramaswami, V. K., & Srinivasan, T. N. (1969). Domestic distortions, tariffs, and the theory of optimum subsidy: some further results. Journal of Political Economy, 77, 1005–1019. CrossRefGoogle Scholar
  6. Blaug, M. (1997). Competition as an end-state and competition as a process. In Trade technology and economics: essays in honour of Richard G. Lipsey (pp. 241–261). Cheltenham: Edward Elgar. Google Scholar
  7. Blaug, M. (2007). The fundamental theorems of modern welfare economics, historically contemplated. History of Political Economy, 32(2), 186–207. Google Scholar
  8. Boadway, R. (1997a). The role of second-best theory in public economics. In B. C. Eaton, & R. G. Harris (Eds.), Trade, technology and economics essays in honour of Richard G. Lipsey (pp. 3–25). Cheltenham: Edward Elgar. Google Scholar
  9. Boadway, R. (1997b). Public economics and the theory of public policy. The Canadian Journal of Economics, 30, 753–772. CrossRefGoogle Scholar
  10. Bohm, P. (1967). On the theory of ‘second best’. Review of Economic Studies, 34, 301–314. CrossRefGoogle Scholar
  11. Bohm, P. (1987). Second best. In J. Eatwell, M. Milgate, & P. Newman (Eds.), The new palgrave, a dictionary of economics (pp. 280–283). London: Macmillan. Google Scholar
  12. Corlett, W. J., & Hague, D. C. (1953–1954). Complementarity and the excess burden of taxation. The Review of Economic Studies, 21, 21–30. CrossRefGoogle Scholar
  13. Davis, O. A., & Whinston, A. B. (1965). Welfare economics and the theory of second best. Review of Economic Studies, 32, 1–14. CrossRefGoogle Scholar
  14. Davis, O. A., & Whinston, A. B. (1967). Piecemeal policy in the theory of second best. Review of Economic Studies, 34, 323–331. CrossRefGoogle Scholar
  15. de Graff, J. (1957). Theoretical welfare economics. Cambridge: Cambridge University Press. Google Scholar
  16. Dertouzos, M. L., Lester, R., & Solow, R. (1989). Made in America: regaining the productive edge. London: MIT Press. Google Scholar
  17. Eaton, B. C., & Lipsey, R. G. (1976). The non-uniqueness of equilibrium in the Loschian model of spatial location. American Economic Review, 66, 77–93. Google Scholar
  18. Eaton, B. C., & Lipsey, R. G. (1978). Freedom of entry and the existence of pure profit. Economic Journal, 88, 455–469. CrossRefGoogle Scholar
  19. Eaton, B. C., & Lipsey, R. G. (1989). Product differentiation. In R. Schmalensee, & R. Willig (Eds.), Handbook of industrial organization (pp. 725–768). Amsterdam: North Holland. Google Scholar
  20. Eaton, B. C., & Lipsey, R. G. (1997). On the foundations of monopolistic competition and economic geography: the selected essays of B. Curtis Eaton and Richard G. Lipsey. Cheltenham: Edward Elgar. Google Scholar
  21. Faith, R. L., & Thompson, E. A. (1981). A paradox in the theory of second best. Economic Inquiry, XIX, 235–244. Google Scholar
  22. Griffiths, P. (2003). The economist’s tale: a consultant encounters hunger and the World Bank. New York: ZED Books. Google Scholar
  23. Harberger, A. C. (1971). Three basic postulates for applied welfare economics: an interpretive essay. Journal of Economic Literature, 9, 785–797. Google Scholar
  24. Hatta, T. (1986). Welfare effects of changing commodity tax rates towards uniformity. Journal of Public Economics, 29, 99–112. CrossRefGoogle Scholar
  25. Hoff, K. (2001). Second and third best theories. In J. Michie (Ed.), Reader’s guide to the social sciences. London: Fitzroy Dearborn. Google Scholar
  26. Knight, F. H. (1921). Risk, uncertainty and profit. New York: Houghton Mifflin Co. Google Scholar
  27. Layard, R. (2005). Happiness: lessons for a new science. London: Penguin Books. CrossRefGoogle Scholar
  28. Lipsey, R. G. (1957). The theory of customs unions: trade diversion and welfare. Economica, 24, 40–46, February. CrossRefGoogle Scholar
  29. Lipsey, R. G. (1970). The theory of customs unions: a general equilibrium analysis. London: Weidenfeld & Nicolson. A late publication of the 1957 Ph.D. thesis by the same name. Google Scholar
  30. Lipsey, R. G. (1997). The selected essays of Richard Lipsey: Volume I: microeconomics, growth and political economy. Cheltenham: Edward Elgar. Google Scholar
  31. Lipsey, R. G., & Lancaster, K. (1956). The general theory of second best. The Review of Economic Studies, 24, 11–32. Reprinted with errors corrected in Lipsey 1997. CrossRefGoogle Scholar
  32. Lipsey, R. G., Carlaw, K. I., & Bekar, C. (2005). Economic transformations: general purpose technologies and long-term economic growth. Oxford: Oxford University Press. Google Scholar
  33. Little, I. M. D. (1951). Direct versus indirect taxes. The Economic Journal, 61(243), 577–584, September. CrossRefGoogle Scholar
  34. Little, I. M. D. (1957). A critique of welfare economics (2nd ed.). Oxford: Clarendon Press. Google Scholar
  35. Mas-Colell, A., Whinston, M.D., & Green, R.J. (1995). Microeconomic theory. New York: Oxford University Press. Google Scholar
  36. McKee, M., & West, E. G. (1981). The theory of second best: a solution in search of a problem. Economic Inquiry, XIX, 436–448. CrossRefGoogle Scholar
  37. McManus, M. (1958–1959). Comments on the general theory of second best. Review of Economic Studies, 26, 209–224. Google Scholar
  38. Ng, Y.-K. (1977). Towards a theory of third-best. Public Finance, 32(1), 1–13. Google Scholar
  39. Ozga, S. A. (1955). An essay in the theory of tariffs. Journal of Political Economy, 63, 489–499, December. CrossRefGoogle Scholar
  40. Samuelson, P. A. (1947). Foundations of economic analysis. Cambridge: Harvard University Press. Google Scholar
  41. Starr, R. M. (1997). General equilibrium theory: an introduction. Cambridge: Cambridge University Press. Google Scholar
  42. Viner, J. (1950). The customs union issue. New York: Carnegie Endowment of International Peace. Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Simon Fraser UniversityBowen IslandCanada

Personalised recommendations