Concluding Comments to the Debate

Abstract

AbstractIn this final piece to the symposium for a special issue of Pacific Economic Review on the theories and applications of second‐best and third‐best theories, Richard Lipsey and Yew‐Kwang Ng provide their final comments to the debate. Several issues of agreement and disagreement are discussed. Most importantly, while both agree on the formal correctness of both the second‐best and third‐best theories, Lipsey believes the main proposition of third‐best theory (following the first‐best rules under Informational Poverty) is applicable only to a situation (status quo) where the first‐best rule (such as taxing a pollution at the marginal damage of $N) is already being followed; Ng regards it as applicable whether or not the first‐best rule is currently being followed. This also partly explains their difference on the practical policy relevance and the importance of that theory.