Second Best

A theorem in welfare economics to the effect that correcting one or more, but not all, market imperfections will not necessarily increase social welfare. For example, well-conducted health technology appraisals may indicate that the use of a particular set of technologies should be encouraged in a publicly funded health care system because the incremental cost-effectiveness ratio (ICER) exceeds a policy threshold, so local health care commissioners are instructed by a central authority to commission these services. In doing this, however, unless the budget is adjusted appropriately, the local commissioner will be forced, at least in the short run, to reduce expenditures on some other technologies which may have higher ICERs. Thus removing the one imperfection (underuse as revealed by the appraisals) may not enhance outcomes if another (the budget) is left unaddressed.

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