Editors’ Introduction

Richard G. Lipsey, Yew Kwang Ng

Research output: Contribution to journalEditorialOtherpeer-review

Abstract

This paper presents the editors’ introduction for a symposium on Second and Third Best Theory forthcoming in The Pacific Economic Review, 22:2, May 2017. Unusual in such cases, the editors are the major protagonists in the debate. In the symposium Ng maintains that second-best theory appears to preclude giving theory-based policy advice because full second-best optima can never be determined in practical cases. While agreeing about second-best optima, Lipsey disagrees with Ng's conclusion regarding policy and discusses the development of context-specific policies not based on the theory of optimal resource allocation. 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 from the first-best value). 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. Woo 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.

Original languageEnglish
Pages (from-to)147-154
Number of pages8
JournalPacific Economic Review
Volume22
Issue number2
DOIs
Publication statusPublished - 1 May 2017
Externally publishedYes

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