Question

an explanation of first best - second best world (distortions and imperfections)

an explanation of first best - second best world (distortions and imperfections)

Homework Answers

Answer #1

For a first-best equilibrium to be present ,the market has to be perfectly competitiv with the absence of any imperfections or distortions. While, a second-best equilibrium occurs when one or more than one imperfections or distortions are included.
The economy when considering both these equilibrias is a small and perfectly competetive open one. In this type of an economy, where there is imminent privatization, firms would be likely to maximize profit and consumers would maximize utility. The involvement of the government in such an economy would be in the likes of letting things take it's own course(or laissez faire). To put it into context, a market might be distorted when there is any factor that prevents free and open competition while an imperfect market might be one where individuals can highly influence prices and production,

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