Theory of the Second Best

The Theory of the Second best concerns what happens when one or more optimality conditions are not satisfied in an economic model. Lipsey and Lancaster showed that if one optimality condition in an economic model is not satisfied, it is likely that all other optimalities will change. For example, in an economy that is purely Walrasian in nature, the optimal government policy to pursue is Laissez Faire . This may change if market failures are present.