Welfare Economics and Second-Best Theory: A Distortion-Analysis Protocol for Economic-Efficiency Prediction

368 Pages·2020·3.442 MB·English

by  Richard S. Markovits

Richard S. Markovits
Welfare
Economics and
Second-Best
Theory
A Distortion-Analysis Protocol
for Economic-Efficiency Prediction
Welfare Economics and Second-Best Theory
Richard S. Markovits
Welfare Economics
and Second-Best Theory
A Distortion-Analysis Protocol
for Economic-Efficiency Prediction
123
Richard S.Markovits
University of Texas Schoolof Law
Austin, TX,USA
ISBN978-3-030-43359-8 ISBN978-3-030-43360-4 (eBook)
https://doi.org/10.1007/978-3-030-43360-4
©SpringerNatureSwitzerlandAG2020
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Appreciation
IthankmywifeandcolleagueIngaMarkovitsandourfivechildren—Daniel,Stefanie,
Benjamin, Julia, and Rebecca—for making it easy to keep what follows in an
appropriateperspective.IalsothankmypersonalassistantSallyZaleskibothforher
friendliness, patience, and diligence and for the vision, intelligence, diagrammatic
abilities,and(Iadmit)cartographicskillsthatenabledhertoconvertacomplicated,
difficult,andhard-to-deciphermanuscriptintoapublishabledocument.
v
Contents
1 Introduction to The General Theory of Second Best, Its Central
Implications, and the Appropriate Way to Respond to It . . . . . . . . 1
1.1 The Conclusion and Basic Rationale of The General Theory
of Second Best. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 TheReasonWhyTheGeneralTheoryofSecondBestHasSuch
Important Implications for the Protocol for Predicting/Post-
dicting the Economic Efficiency of a Choice that Is Ex Ante
Economically Efficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 The Negative Economic-Efficiency-Conclusion-Related
Implications of The General Theory of Second Best. . . . . . . . . . 5
1.4 The Protocol for Economic-Efficiency Analysis that Responds
ExAnteEconomicEfficientlytoTheGeneralTheoryofSecond
Best: A Somewhat-Detailed but Far-From-Comprehensive
Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4.1 10 Concepts or Sets of Related Concepts that Play an
Important Role in the Protocol for Economic-Efficiency
Prediction/Post-dictionIClaimIsExAnteEconomically
Efficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4.2 The Protocol for Determining Whether It Would Be
ExAnteEconomicallyEfficient(TBLE)toExecuteAny
Task that Could Inform One’s Assessment of the
Economic Efficiency of a Choice . . . . . . . . . . . . . . . . . . 13
1.4.3 16 Categories of Resource Allocations (and Related
Categories of Economic Inefficiency) . . . . . . . . . . . . . . . 14
1.4.4 A Somewhat-Detailed but Far-From-Comprehensive
Account of the Protocol for Predicting/Post-dicting
the Economic Efficiency of a Choice that I believe
Is TBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2 The Economics Profession’s Responses to The General Theory
of Second Best: Descriptions and Critiques. . . . . . . . . . . . . . . . . . . 35
2.1 The Theoretical-Welfare-Economics Literature that Does
Address The General Theory of Second Best . . . . . . . . . . . . . . . 36
vii
viii Contents
2.2 The Failure of the Bulk of Applied-Welfare-Economics
Scholarship to Respond Ex Ante Economic-Efficiently
to The General Theory of Second Best . . . . . . . . . . . . . . . . . . . 57
2.3 The Failure of Undergraduate and Graduate Textbooks
on Theoretical and Applied Welfare Economics to Respond
Appropriately to The General Theory of Second Best. . . . . . . . . 69
2.4 The Inadequacy of the Arguments that Various Economists
Have Made to Justify Ignoring The General Theory
of Second Best. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
2.5 Some Personal Anecdotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2.6 The Reasons Why Economists Have Resisted The General
Theory of Second Best . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3 The Concept of the Impact of a Choice (or Natural Event)
on Economic Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
3.1 The “Correct” Definition of “The Impact of a Choice
on Economic Efficiency”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
3.2 The Alternative Definitions of “The Impact of a Choice
onEconomicEfficiency”thatOtherEconomistsHaveProposed
and Used and Why These Alternatives Are Either Useless
or Inaccurate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
4 “First-Best,” “Second-Best,” and “Third-Best”: Definitions,
Elaborations, and Other Economists’ Usages . . . . . . . . . . . . . . . . . 109
4.1 First-Best-Allocatively-Efficient (FBLE) Economic-Efficiency-
Analysis Protocols, FBLE Concrete Economic-Efficiency
Analyses, and the FBLE Magnitude of Any Pareto
Imperfection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
4.2 Second-Best-Allocatively-Efficient (SBLE) Economic-
Efficiency-Analysis Protocols, SBLE Concrete Economic-
Efficiency Analyses, and the SBLE Magnitude of Any Pareto
Imperfection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
4.3 Third-Best-Allocatively-Efficient(TBLE)Economic-Efficiency-
Analysis Protocols, TBLE Concrete Economic-Efficiency
Analyses, and the TBLE Magnitude of Any Pareto
Imperfection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
4.4 The Differences Between My Use of the Expressions
“First-Best,” “Second-Best,” and “Third-Best” and the Ways
in Which These Expressions Are Used by Other
Economists—In Particular, by Y.-K. Ng and Richard Lipsey. . . . 114
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Contents ix
5 The Symbols for Various Pareto Imperfections, Private
and Allocative Concepts, Categories of Resource-Uses,
and Categories of Resource Allocations . . . . . . . . . . . . . . . . . . . . . 117
5.1 The Symbols I Use to Reference, Respectively, Each Type
of Pareto Imperfections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
5.2 The Symbols I Use to Reference, Respectively, the Private-
Benefit, Private-Cost, (Private) Profit, Allocative-Benefit,
Allocative-Cost, and Allocative-Efficiency Figures Associated
with a Specified Resource-Use or Resource Allocation . . . . . . . . 119
5.3 The Symbols I Use to Reference, Respectively, Three
Functional Categories of Resource-Uses. . . . . . . . . . . . . . . . . . . 120
5.4 The Symbols I Use to Reference, Respectively, Six Functional
Categories of Resource Allocations . . . . . . . . . . . . . . . . . . . . . . 121
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
6 The Vocabulary and Symbols of Distortion Analysis . . . . . . . . . . . 125
6.1 The “Distortion Analysis” Definitions of “a Distortion,”
“the Aggregate Distortion,” or “the Aggregate Percentage-
Distortion” in a Relevant Private-Benefit, Private-Cost,
or (Private-) Profit Figure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
6.1.1 The Distortion in a Private-Benefit, Private-Cost,
or (Private-) Profit Figure. . . . . . . . . . . . . . . . . . . . . . . . 126
6.1.2 The Aggregate Distortion in Any Private-Benefit,
Private-Cost, or (Private-) Profit Figure. . . . . . . . . . . . . . 126
6.1.3 The Aggregate Percentage-Distortion in Any Private-
Benefit, Private-Cost, or (Private-) Profit Figure. . . . . . . . 127
6.2 The Three Basic Categories of Profit-Distortion Formulas that
This Study References and Their Various Subcategories . . . . . . . 127
6.2.1 Conventional, Otherwise-Pareto-Perfect (oPp)
Profit-Distortion Formulas . . . . . . . . . . . . . . . . . . . . . . . 127
6.2.2 The Onesy Formula for the Aggregate Distortion in the
Profits Yielded by a Resource Allocation—i.e., for the
Distortion in Those Profits Generated by All Exemplars
the Relevant Economy Contains of All Seven Types of
Pareto Imperfections—(1E)RD(Pp…/…). . . . . . . . . . . . . . 129
6.2.3 The Step-Wise-Distortion Formula for the Distortion
that All Exemplars of All Seven Types of Pareto
Imperfections Will Generate in the Profits Yielded by
a Specified Resource Allocation—(SW)RD(Pp…/…). . . . . 130
6.3 The Symbols that Reference Various Distortion-Concepts. . . . . . 131
6.3.1 The Symbol for the Aggregate Distortion in Some
To-Be-Specified Private Figure Associated with a
To-Be-SpecifiedMarginalorNon-MarginalAllocation—
RD(P…(…)D…/(…)D…)orRD(P…(…)…/(…)…)............ 131
x Contents
6.3.2 The Symbols for the Conventional oPp Distortions that
All Exemplars of One-to-Six Types of Pareto
Imperfections Would Generate in a To-Be-Specified
or Specified Private Figure Associated with
a To-Be-Specified or Specified Resource Allocation
(in an Otherwise-Pareto-Perfect Economy) . . . . . . . . . . . 134
6.3.3 The Symbol for the Onesy Formula for the Aggregate
Distortion in the Profits Yielded by Any Specified or
To-Be-Specified Economics-Marginal or Economics-
Non-Marginal Resource Allocation . . . . . . . . . . . . . . . . . 135
6.3.4 The Symbols for the Individual-Pareto-Imperfection-
Oriented Step-Wise Distortion in a Specified or To-Be-
Specified Private Figure Associated with a Specified or
To-Be-Specified Economics-Marginal or Economics-
Non-MarginalResourceAllocationtoaTo-Be-Specified
or Specified ARDEPPS . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.3.5 The Symbol for the Step-Wise-Distortion Formula
for an Aggregate Distortion in a Specified
or To-Be-Specified Private Figure Associated with
a Specified or To-Be-Specified Economics-Marginal
or Economics-Non-Marginal Resource Allocation . . . . . . 136
6.4 An Illustration of the Onesy Formula for the Aggregate
Distortion in the Profits Yielded by Any Resource Allocation . . . 136
6.5 An Illustration of the Step-Wise-Distortion Formula for the
Aggregate Distortion in the Profits Yielded by a Particular
Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
6.6 The Ways in Which the (1E) and (SW)D Formulas for the
AggregateDistortionintheProfitsthatWouldBeYieldedbyan
Economics-Marginal UO-to-UO Resource Allocation Will
HavetoBeAlteredWhenthatAllocationIsfromtheProduction
ofJust-Extra-MarginalUnitsofTwoorMoreProductsY1…nto
theProductionofaMarginalUnitofOneProduct(X)andWhen
Both Y1…n and X Have Complements (Respectively,
YC and XC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.6.1 TheRevisioninthe1EFormulaandthe(SW)DFormula
for the Aggregate Distortion in the Profits Yielded by a
UO-to-UO Resource Allocation to the Production of
Product X When that Allocation Involves the
Withdrawal of Resources from the Production of Just-
Extra-Marginal Units ofaSetofProducts Y1…n Rather
Than from the Production of Just-Extra-Marginal Units
of a Single Product Y. . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Contents xi
6.6.2 The Revisions in the 1E Formula and the (SW)D
Formula for the Aggregate Distortion in the Profits
YieldedbyaUO-to-UOResourceAllocationWhenthat
Allocation Involves the Withdrawal of Resources from
the Production of Just-Extra-Marginal Units of One or
More Goods and Their Complement(s) and Their
Devotion to the Production of a Marginal Unit
of Another Good and Its Complement(s). . . . . . . . . . . . . 150
6.7 The Relative Economic Efficiency of Using 1E and (SW)D
FormulasfortheAggregateDistortionintheProfitsYieldedby
Any Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Reference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
7 Analyses of Various Step-Wise-Monopoly Distortions. . . . . . . . . . . 153
7.1 The Step-Wise-Monopoly Distortion in PB , PB ,
(U)UO (U)QV
and PB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
(U)PPR
7.1.1 The Step-Wise Imperfections-in-Seller-Price-
Competition-Generated Monopoly Distortions
in PB , PB , and PB . . . . . . . . . . . . . . . . . 154
(U)UO (U)QV (U)PPR
7.1.2 The Step-Wise Imperfections-in-QV-Investment-
Competition-Generated and Step-Wise Imperfections-
in-PPR-Competition-Generated Monopoly Distortions
in PB and PB . . . . . . . . . . . . . . . . . . . . . . . . 173
(U)QV (U)PPR
7.1.3 The Step-Wise-Monopoly Distortion that Imperfections
inSellerPrice-CompetitionandInvestment-Competition
Generate in the Profits Yielded by Some QV
Investments and Some PPR Projects by Leading
Governments to Classify Some Firms that Face Such
Seller-Competition Imperfections to Be Public Utilities
and to Subject the Pricing of the Products Such Firms
Allegedly “Monopolize” to “Fair-Rate-of-Return”
Pricing-Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
7.2 The Step-Wise-Monopoly Distortion in the Profits Yielded
by Various Categories of Economics-Marginal Resource
Allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
7.2.1 The Step-Wise-Monopoly Distortion in the Profits
Yielded by Resource Allocations from Specifiable
UO-Producing-and Consuming, QV-Investment-
Creating-and-Using, and PPR-Executing-and-Using
Pairs of Resource-Uses to Individual Specifiable Pairs
ofEconomics-MarginalUO-Producing-andConsuming,
QV-Creating-and-Using, or PPR-Executing-and Using
Resource-Uses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186