Public Finance, 2nd Edition

3

FIRST-BEST AND SECOND-BEST

ANALYSIS AND THE POLITICAL

ECONOMY OF PUBLIC

SECTOR ECONOMICS

LUMP-SUM REDISTRIBUTIONS AND PUBLIC SECTOR THEORY

FIRST-BEST ANALYSIS

The Two Dichotomies in First-Best Models

SECOND-BEST ANALYSIS

Constrained Social Welfare Maximization

The Most Common Policy and Market Constraints

Further Implications of Second-Best Modeling

SIMILARITIES BETWEEN FIRST-BEST AND

SECOND-BEST ANALYSIS

THE POLITICAL ECONOMY OF THE SOCIAL

WELFARE FUNCTION

The Form of the Social Welfare Function: From Utilitarian to Rawlsian

A Flexible Social Welfare Function

Arrow's Impossibility Theorem

The Gibbard±Satterthwaite Theorem

Reactions to the Arrow and Gibbard±Satterthwaite Theorems

CONCLUSION

Chapter 3 concludes our introduction to normative public sector eco-

nomics with a discussion of two issues. One is the distinction between Wrst-

best and second-best analysis. The other is the political economy of public

sector theory, centered around the social welfare function and Arrow's

Impossibility theorem. The social welfare function is the one indispensable

political element in normative mainstream public sector models.

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