First and Second-Best

Asked Jul 13 '21 at 23:26

Active Jul 13 '21 at 23:26

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Why are environmental instruments like Pigovian-taxes or the Coase-Theorem viewed as first-best solutions, while taxes or tradable permits are viewed as second best? How do they differ, and what makes a first-best solution a first-best solution?

Help is much appreciated!

asked Jul 13 '21 at 23:26

mingabua

Hi! What do you mean by "how do they differ"? Is this a homework question? – Giskard Jul 14 '21 at 03:44
It's not. I came across an article last morning. It was quite an interesting read but I left with open questions. Well it's hard to describe. I just want to know why a Pigovian tax can lead to a first best solution and tradeable permits cannot? And I don't quite get the difference between a first-best solution and a second best. – mingabua Jul 14 '21 at 05:52
Could you please edit a link to the article into your question? – Giskard Jul 14 '21 at 06:53
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Tradable permits (and taxes) can reach a first-best solution too, provided you get the amount of permits (or the tax rate) right and there are no other complications – Maarten Punt Jul 14 '21 at 10:45
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FYI: https://economics.stackexchange.com/questions/4495/what-is-the-definition-of-first-best-second-best-etc-in-contract-theory – Royun Jul 14 '21 at 14:08
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Does this answer your question? What is the definition of "First Best", "Second Best", etc. in contract theory? – Giskard Jul 14 '21 at 19:30

First and Second-Best

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