- noun the theory that when what is required for an optimum economic situation is not available, then aiming for a second-best solution may have important implications for trade policies and even government policies
(written as Second Best)A theorem in welfare economics to the effect that correcting one or more, but not all, market imperfections will not necessarily increase social welfare. For example, well-conducted health technology appraisals may indicate that the use of a particular set of technologies should be encouraged in a publicly funded health care system because the incremental cost-effectiveness ratio (ICER) is below a policy threshold, so local health care commissioners are instructed by a central authority to commission these services. In doing this, however, unless the budget is adjusted appropriately, the local commissioner will be forced, at least in the short run, to reduce expenditures on some other technologies that may have higher ICERs. Thus, removing the one imperfection (underuse as revealed by the appraisals) may not enhance outcomes if another (the budget) is left unaddressed. More generally, no real-world market achieves a first-best equilibrium due to a multiplicity of market failures, so there is much ingenuity expended (and employment for economists) in identifying ways of improving existing arrangements. The inventors of the concept were Lipsey and Lancaster (1956).
Information & Library Science
- adjective considered to be slightly inferior, not the best of its kind