Chapter 35 Market failures and second-best analysis with a focus on nutrition, credit, and incomplete markets

This chapter studies second-best models of nutritional externalities, credit, and incomplete markets for risk, developing implications for welfare-improving government policy using primitive economic building blocks. Using a simple model of altruism wherein the rich obtain utility from the nourishment of the poor, the analysis describes efficiency properties of alternative food subsidy policies, with and without enforcement costs of targeting subsidies to the poor. In three models of imperfect information in credit markets, the chapter characterizes equilibrium financial contracts and policy remedies to inefficiencies. Finally, welfare properties of stereotypical agricultural policies are developed in a stochastic production economy with incomplete markets.