What is a first-best?
A first-best policy is that policy that can improve national welfare to the greatest extent when beginning in a second-best equilibrium. A second-best policy is one whose best national welfare effect is inferior to a first-best policy when beginning in a second-best equilibrium.
What is a first-best outcome?
In this case, the same outcome can be achieved that would be attained with verifiable effort: The agent chooses the so-called “first-best” effort level that maximizes the expected total surplus of the two parties.
What is first-best contract?
The first-best refers to the best you could do if you knew agents’ preferences over labor and income (i.e., if you did not have to impose the incentive compatibility constraint), and the second-best is the best you can do if agents have to reveal their preferences themselves.
What is the first-best allocation?
First-best allocations are economically efficient, but need not be equitable. If the policy-maker is subject to constraints additional to technology and resources then only second-best allocation can be achieved.
What is the general theory of second best?
Second-best theory, also known as the theory of the second best, is a concept in economics that if a requirement for achieving an optimum economic situation is not satisfied, making a concerted attempt to satisfy those requirements that can be met might not be the second-best option, and may be harmful.
What is second best pricing?
Pricing by a public enterprise is labeled “second-best” when the enterprise must depart from ideal marginal cost prices for some accepted reason, such as to avoid too great a financial loss, and does so in a way that minimizes the consequent loss in economic welfare.
What is John Locke’s social contract theory?
In simple terms, Locke’s social contract theory says: government was created through the consent of the people to be ruled by the majority, “(unless they explicitly agree on some number greater than the majority),” and that every man once they are of age has the right to either continue under the government they were …
What are the three theories of contract law?
Theories of contract law fall into three basic categories: formalist, interpretive, and normative.
What are the conditions of welfare optimum?
This condition states that the marginal rate of transformation between any factor and any product must be the same for any pair of firms using the factor and producing the product”. It means that the marginal productivity of any factor in producing a particular product must be the same for all the firms.
What is first welfare theorem?
-First fundamental theorem of welfare economics (also known as the “Invisible Hand Theorem”): any competitive equilibrium leads to a Pareto efficient allocation of resources. The main idea here is that markets lead to social optimum.
How would you describe your second best?
Second best is used to describe something that is not as good as the best thing of its kind but is better than all the other things of that kind. He put on his second best suit. You can use second best to describe something that you have to accept even though you would have preferred something else.
What is the theory of second best what is its importance?
Who developed the theory of second best?
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
What were the 3 natural rights Locke believed everyone should have?
Among these fundamental natural rights, Locke said, are “life, liberty, and property.” Locke believed that the most basic human law of nature is the preservation of mankind.
How do Thomas Hobbes and John Locke differ?
Hobbes was a proponent of Absolutism, a system which placed control of the state in the hands of a single individual, a monarch free from all forms of limitations or accountability. Locke, on the other hand, favored a more open approach to state-building.
What is welfare maximum?
According to the Max-Min criterion, welfare is maximized when the utility of those society members that have the least is the greatest. No economic activity will increase social welfare unless it improves the position of the society member that is the worst off.
What is the first theorem?
Proof of the first fundamental theorem An equilibrium in this sense either relates to an exchange economy only or presupposes that firms are allocatively and productively efficient, which can be shown to follow from perfectly competitive factor and production markets.