Which of the following illustrates the principle of second best?

Question

Quizplus · Accepted Answer

The principle of second best states that when it is not possible to achieve the first-best outcome, the second-best outcome is the one that is closest to the first-best outcome. In this case, the first-best outcome would be to have the paper manufacturer pay for the full cost of cleaning up the river. However, since this is not possible, the second-best outcome is to impose a tax on the paper manufacturer that equals the cost of cleaning up the river. This tax will discourage the paper manufacturer from polluting the river, and it will also generate revenue that can be used to pay for the cleanup.

Which of the Following Illustrates the Principle of Second Best