Featherbedding—An easy second best problem

Conclusions The difficulties of second best, as propounded by Lipsey and Lancaster and reasserted by Allingham and Archibald, derive from the allegation that associated with second best optima are necessary conditions that require the violation of necessary first best conditions and which cannot be satisfied by known market forms or decentralized management rules. Specifically, it is alleged that for second best no “solutions” analogous to perfect competition and marginal cost pricing exist. In this paper it has been demonstrated that second best difficulties are not quite as universal as Allingham and Archibald suppose. We have seen that featherbedding contracts give rise to genuine second best situations but that the associated problems are easily solved. If a production unit grants a featherbedding contract but otherwise acts as a price taking profit maximizer, in terms of Paretian criteria (assuming no difficulties at the second order level) no policy action is called for unless society is willing to outlaw the featherbedding contract. Otherwise, the appropriate management rule is simply “behave as a price taking profit maximizer” where this behavior is clearly specified in (28) above and analogous to marginal cost pricing in the first best case.