Theory of the Second Best
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The Theory of the Second Best concerns what happens when one or more optimality conditions are not satisfied in an economic model. The Canadian economist Richard Lipsey (1928-present) and the Australian economist Kelvin Lancaster (1924-1999) showed that if one optimality condition in an economic model is not satisfied, it is possible that the next-best solution will involve changing other variables away from their previous optimal ones. This means that in an economy with some unavoidable market failure, it may be optimal for the government to intervene. This contrasts with the idea that a more laissez faire policy is always more efficient.
[edit] Literature
- R.G. Lipsey & Kelvin Lancaster, The General Theory of Second Best, The Review of Economic Studies, Vol. 24, No. 1. (1956 - 1957), pp. 11-32.
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