Chapter 3

First-Best and Second-Best Analyses and the Political Economy of Public Sector Economics

Abstract

Chapter 3 discusses two issues. One is the distinction between first-best and second-best analyses. The other is the political economy of public sector theory, centered on 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.

Keywords

Arrow; impossibility theorem; First-best analysis; Gibbard–Satterwaithe theorem; Rawlsian social welfare function; Utilitarian (Benthamite) social welfare function

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