Question

B.What is the first-best policy of the government? Is it feasible? Why? Suppose the commitment technology is not available and so the policy enforcement is left to the discretion of the same government who makes the policy.

Answer 1

A first-best policy is thatpolicy that can improve national welfare to the greatest extent when beginning in a second-bestequilibrium. A second-best policy is one whose bestnational welfare effect is inferior to a first-best policywhen beginning in a second-best equilibrium.