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The theory of the second best suggests that when two or more markets are not perfectly competitive, then efforts to correct only one of the distortions may in fact drive the economy further away from Pareto efficiency.

Thus, for example, if there is one industry which can never satisfy all the conditions for perfect competition, it is no longer clear that the optimal policy is to move the remaining industries towards perfect competition. Moreover, the conditions under which Pareto efficiency can be achieved under these circumstances are complex and not likely to be implementable.

Thus, the defence of competition policy often requires giving weight to more than Pareto efficiency. For example, competition policy may be defended on the grounds of equity, democracy and incentives. However, achievement towards Pareto efficiency is generally given more weight in the application of competition policy.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Wednesday, January 4, 2006