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 impose a tax on the meat processing plant that equals the cost of the damage caused by the waste discharged into the lake. However, this is not possible because the government cannot accurately measure the cost of the damage. The second-best outcome is to impose a tax that is less than the cost of the damage, but that still discourages the meat processing plant from discharging waste into the lake.

Which of the Following Illustrates the Principle of Second Best