Second-Best Theory: Lessons for Economists and Lawyers

Professor Markovits will speak about second-best theory: lessons for economists and lawyers.

This is a free event however registration is required in advance. Refreshments will be available.

Abstract:

Here is the central conclusion of The General Theory of Second Best and the basic reason why it is correct: In a situation in which one or more members of a set of sufficient conditions for the achievement of an optimum cannot be or will not be fulfilled (henceforth “in a situation in which the relevant system will inevitably contain one or more ‘imperfections’”), the elimination of or reduction of the magnitude of any individual imperfection or set of imperfections in a system that will still contain one or more imperfections afterwards will be as likely to worsen the relevant outcome by any given amount because (on balance) the imperfections that would be removed counteracted the net effect of the remaining imperfections in the system to any given extent as it will be to improve the outcome by that amount because (on balance) the removed imperfections compounded the net effect of the remaining imperfections in the system to the same extent. When the relevant optimum is maximizing economic efficiency, The General Theory of Second Best implies that the fact that (1) no imperfections in seller-competition, (2) no imperfections in buyer-competition, (3) no (real) externalities, (4) no taxes on the margin of income, (5) no resource-allocator non-sovereignty, (6) no principal-resource-allocator non-maximization, and (7) no critical buyer surplus constitute a set of sufficient conditions (the set of Pareto-optimal conditions) for economic efficiency’s being maximized does not imply that choices that increase the extent to which each or all of these conditions is/are fulfilled will even tend to increase economic efficiency on that account if the economy will remain Pareto-imperfect post-choice or that choices that decrease the extent to which each or all of these conditions is/are fulfilled will even tend to decrease economic efficiency on that account if the economy contained one or more Pareto imperfections pre-choice.

My presentation at the seminar will (1) outline the protocol for economic-efficiency analysis that I think is economically efficient to use (that constitutes the economically-efficient response to The General Theory of Second Best), (2) analyze briefly the implications of The General Theory of Second Best for the economic efficiency of (A) making tort-injurers strictly liable (if one ignores various other tort-law doctrines and tort-law-process-related social realities that independently cause the profitability of avoidance to a potential injurer to diverge from its economic efficiency and assumes that tort-victims cannot engage in economically-efficient avoidance), (B) internalizing externalities more generally, (C) prohibiting conduct that would decrease price competition, and (D) prohibiting conduct that would reduce the competition that firms engage in by introducing different or superior product variants, opening up different or superior distributive outlets, or adding to their capacity or inventory, and (3) if time and interest warrant, discuss the implications of The General Theory of Second Best for the appropriate way to analyze the impact of choices on many desiderata other than economic efficiency that the law and lawyers value, including (A) political truth (the marketplace of ideas metaphor), (B) legal truth (rules of evidence, qualifications of judges and juries and judge and jury selection-processes, and attributes of alternative-dispute-resolution processes), (C) various conceptions of vertical distributive justice, horizontal distributive justice, and election/law-creation/adjudication-participation-related moral rights, and (D) many conceptions of the moral good.

Professor Markovits teaches and writes in the areas of antitrust, law and economics, constitutional law and jurisprudence. He is the author of articles in the Harvard Law Review, Yale Law Journal, Stanford Law Review and elsewhere as well as the book Matters of Principle: Legitimate Legal Argument and Constitutional Interpretation (NYU, 1998). He created the Texas Law School's nationally recognized course on "Legal Scholarship," designed to prepare future law teachers. He came to Texas from Stanford Law School in 1976.