Why are environmental instruments like Pigovian-taxes or the Coase-Theorem viewed as first-best solutions, while taxes or tradable permits are viewed as second best? How do they differ, and what makes a first-best solution a first-best solution?

Help is much appreciated!

  • $\begingroup$ Hi! What do you mean by "how do they differ"? Is this a homework question? $\endgroup$
    – Giskard
    Commented Jul 14, 2021 at 3:44
  • $\begingroup$ It's not. I came across an article last morning. It was quite an interesting read but I left with open questions. Well it's hard to describe. I just want to know why a Pigovian tax can lead to a first best solution and tradeable permits cannot? And I don't quite get the difference between a first-best solution and a second best. $\endgroup$
    – mingabua
    Commented Jul 14, 2021 at 5:52
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    $\begingroup$ Tradable permits (and taxes) can reach a first-best solution too, provided you get the amount of permits (or the tax rate) right and there are no other complications $\endgroup$ Commented Jul 14, 2021 at 10:45
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    $\begingroup$ FYI: economics.stackexchange.com/questions/4495/… $\endgroup$
    – Royun
    Commented Jul 14, 2021 at 14:08
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    $\begingroup$ Does this answer your question? What is the definition of "First Best", "Second Best", etc. in contract theory? $\endgroup$
    – Giskard
    Commented Jul 14, 2021 at 19:30


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