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A Critique of Ng's Third-Best Theory

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Date created
2012
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Abstract
The theory of second best established that the effect on community welfare of any one policy change varies with the specific context in which that change occurs. In paper that has been frequently quoted to justify specific policies, Ng argues that fulfilling firstbest conditions piecemeal is an optimal policy under quite general conditions when neither full first nor second best optima are achievable. This paper first argues that Ng's conclusion does not follow from his own assumptions, which imply instead that the status quo should be maintained, whatever it might be. Next it gives one illustrative example showing how much damage can be caused by following Ng's advice. It then argues that when Ng's key assumption is replaced by one that is closer to the facts, there is no general a priori presumption for adopting any specific policy, including maintaining the status quo. The paper closes with some observations on the usefulness of welfare economics even when the full implications of second best theory are accepted.
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You are free to copy, distribute and transmit this work under the following conditions: You must give attribution to the work (but not in any way that suggests that the author endorses you or your use of the work); You may not use this work for commercial purposes.
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Peer reviewed?
No
Language
English
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