Decompositions and general theory of second best

TL;DRAbstract

In most of the rest of the book, we will focus on project analysis. The framework (as developed in Chapters 6 and 7) is one in which decentralized government agencies make independent decisions on collective-goods provision in a mixed economy. The underlying status quo can be any configuration of publicly determined variables that is consistent with private-sector equilibrium. In particular, there will be no presumption of optimality in any of these choices. Any proposed change in this status quo can be thought of as defining a project. Hence, our concept of a project covers such diverse activities as a weather satellite, a pollution cleanup campaign, and a tax reform proposal. Naturally, the agencies cannot act completely independently since they are linked through the budget constraint. Further, we want agencies to take into account all relevant inter-dependencies. The principal aim of project analysis is to find ways of measuring project net benefits that correctly account for gener

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