Second best theory

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The theory of the second best (also the theory of the second best or best possible ) deals with the possibility of optimizing the efficient allocation of resources under conditions of market failure in the context of welfare economics . The term goes back to James Meade . According to Lipsey and Lancaster (1956) "the general theory of second best ... that if one of the conditions for Pareto optimality is not possible, then a second best solution can only be achieved if all other conditions are deviated from." The demand that can be derived from the theory of efficient allocation , that competition should be created in all branches of the economy, is questioned .

The second-best criterion therefore assumes that meeting the greatest possible number of efficiency conditions does not have to be expedient if there are already unchangeable distortions. Instead, the welfare loss for society can be minimized if the state appropriately distorts other efficiency conditions.

However, it also depends on the existing forms of market failure , their respective characteristics and other market characteristics. It can also make sense for the state to intervene in the event of two simultaneously occurring and intensifying forms of market failure. If, on the other hand, two types of market failure cancel each other out, government intervention to create market-like conditions could be detrimental to efficiency. In many cases, Pareto efficiency cannot even come close. In addition to reasons of Pareto efficiency, competition policy should therefore also consider aspects of justice and democracy .

Third best theory

The economist Yew-Kwang Ng (2017) argues that we live in a third-best world in which administrative and informational restrictions mean that it is not possible in practice to find and implement the solutions of the theory of second-best. Ng shows that the optimal strategy in a third-best world consists in fulfilling as many rules as possible from the first-best world, since this maximizes the expected utility. Ng (2020) analyzes the practical implications of his third-best theory for effective altruism , an attempt to improve the lives of as many sentient beings as possible.

literature

  • James E. Meade: Trade and Welfare . Oxford University Press, London; New York 1955.
  • Richard G. Lipsey, Kelvin Lancaster : The General Theory of Second Best. In: The Review of Economic Studies. Vol. 24, No. 1, 1956/1957, ISSN  0034-6527 , pp. 11-32.
  • James A. Henderson, Jr .: Extending the Boundaries of Strict Products Liability: Implications of the Theory of the Second Best. In: University of Pennsylvania Law Review. Vol. 128, No. 5, May 1980, ISSN  0041-9907 , pp. 1036-1093.
  • Alejandro Izquierdo ~ Ernesto Talvi (2009): Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America and the Caribbean
  • Yew-Kwang Ng, 2017: "Towards a Theory of Third-Best," Pacific Economic Review , 22 (2), pp. 155-166. Abstract .
  • Yew-Kwang Ng, 2020: "Effective altruism despite the second-best challenge: Should indirect effects Be taken into account for policies for a better future ?," Futures , 121. Abstract .

Individual evidence

  1. ^ Lipsey and Lancaster 1956, p. 12.
  2. ↑ Manfred Neumann: Competition Policy: History, Theory and Practice, Gabler Verlag, 2000, p. 115.
  3. ^ Theory of the Second Best. In: OECD Glossary of Statistical Terms. OECD, January 4, 2006, accessed January 17, 2016 .
  4. ^ Yew-Kwang Ng: Towards a Theory of Third-Best . In: Pacific Economic Review . tape 22 , no. 2 , 2017, ISSN  1468-0106 , p. 155–166 , doi : 10.1111 / 1468-0106.12219 ( wiley.com [accessed July 5, 2020]).
  5. ↑ Yew-Kwang Ng: Effective altruism despite the second-best challenge: Should indirect effects Be taken into account for policies for a better future? In: Futures . tape 121 , ISSN  0016-3287 , p. 102568 , doi : 10.1016 / j.futures.2020.102568 ( sciencedirect.com [accessed July 5, 2020]).