What theory states that if one optimal condition is not met, achieving other optimal conditions may not improve welfare?

The theory stating that failing to meet one optimal condition can make other optimal conditions ineffective is the theory of the second best.

In welfare economics, the idea was developed by Richard Lipsey and Kelvin Lancaster in 1956. Their result challenged the assumption that policymakers can improve welfare simply by satisfying as many first-best conditions as possible when one condition is unattainable.

The conditions of an ideal economy—such as efficient markets, perfect information, and absent externalities—are interdependent. If one distortion remains, the best achievable outcome may require deliberately changing another market or policy condition. A further distortion can sometimes offset the original one.

A common mistake is to confuse “second best” with “almost first best.” The theory does not say that every additional intervention helps; it says the overall system must be evaluated together. It also differs from the first and second welfare theorems, which describe conditions connecting competitive markets, efficiency, and redistribution.