Theory of the Second Best
Version 1.0.0 · Updated 2026-07-30
CORE DEFINITION
If a condition in an ideal economic system (such as perfect competition) cannot be satisfied, then attempting to satisfy other ideal conditions (such as eliminating tariffs) may not necessarily improve the situation, and may even worsen it. In a distorted market, introducing another distortion (such as a subsidy) may offset the previous distortion, achieving a 'second best' state.
SCAFFOLDING EFFECT
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The trap of partial improvement. In an imperfect system, blindly pursuing local 'perfection' is dangerous. If the best cannot be achieved, a mix of 'bad institutions' may be more effective than a single 'good institution'.
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When some optimality conditions cannot be satisfied, satisfying the remaining conditions may not improve welfare; the first-order conditions for the optimum no longer hold when constraints are incomplete, requiring compensatory distortions.
MINIMUM ACTION
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Theory_of_the_second_bestverified
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