|my favorite cases of the theory of the second best:
the original case referred to the creation of a trade bloc, e.g.,
NAFTA (ignoring all the stuff not related to tariffs and quotas).
Creating a bloc would "free up" trade within the area, but might
displace trade between the bloc and the rest of the world (Europe,
Japan). Because of the latter, it may actually hurt "welfare."
a purely micro example (it doesn't need general equilibrium): consider
a polluting monopoly that's forced (perhaps via anti-trust) to act
like a purely competitive firm. Output increases, along with
pollution. The latter means that welfare need not increase.
To me this says that economists need to study the world rather than
acting on the basis of a model (i.e., increased marketization -->