<p>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?</p>
<p>Help is much appreciated!</p>

CC BY-SA 4.0
2021-07-14T03:44:21.163Z
Hi! What do you mean by "how do they differ"? Is this a homework question?
Giskard
CC BY-SA 4.0
2021-07-14T05:52:54.067Z
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.
mingabua
CC BY-SA 4.0
2021-07-14T06:53:42.250Z
Could you please edit a link to the article into your question?
Giskard
CC BY-SA 4.0
2021-07-14T10:45:50.960Z
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
Maarten Punt
CC BY-SA 4.0
2021-07-14T14:08:35.930Z
FYI: https://economics.stackexchange.com/questions/4495/what-is-the-definition-of-first-best-second-best-etc-in-contract-theory
Royun
CC BY-SA 4.0
2021-07-14T19:30:21.943Z
Does this answer your question? [What is the definition of "First Best", "Second Best", etc. in contract theory?](https://economics.stackexchange.com/questions/4495/what-is-the-definition-of-first-best-second-best-etc-in-contract-theory)
Giskard
<general-equilibrium><environmental-economics>
First and Second-Best
mingabua
# First and Second-Best

(Asked by: username_0 on 2021-07-13)

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!

**Tags:** general-equilibrium, environmental-economics
> **Comments:**
> **username_1**: Hi! What do you mean by "how do they differ"? Is this a homework question?  
> **username_0**: 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.  
> **username_1**: Could you please edit a link to the article into your question?  
> **username_2**: 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  
> **username_3**: FYI: https://economics.stackexchange.com/questions/4495/what-is-the-definition-of-first-best-second-best-etc-in-contract-theory  
> **username_1**: Does this answer your question? [What is the definition of "First Best", "Second Best", etc. in contract theory?](https://economics.stackexchange.com/questions/4495/what-is-the-definition-of-first-best-second-best-etc-in-contract-theory)  

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## 0 answers

