Editors’ Introduction

Abstract

AbstractThis 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.