Introduction

In second-best models, attention is typically focussed on a particular source of departure from economic efficiency (like taxes, a budget constraint, monopoly power, an externality, incomplete markets …). The analysis aims at defining optimal policies to cope with this source of inefficiency. It is usually assumed that the economy is otherwise competitive. This makes the problem well defined, and amenable to analysis with the powerful tools of microeconomics and general equilibrium theory. In some cases, this assumption is justified. In other cases, it is clearly inappropriate, as when imperfect competition or quantity rationing (especially of labour supply) prevail. The practical problems of defining second-best public policies in an environment where prices do not reflect economic scarcities are particularly challenging in Western Europe today.

To some extent, macroeconomic theory is concerned with welfareimproving public policies in non-competitive environments. And recent contributions have developed some links between macroeconomics and general equilibrium theory. These developments are conducive to sharper statements of welfare objectives in macroeconomic analysis.

A beginning has also been made at extending the traditional secondbest methodology to more general assumptions about the regime prevailing in the rest of the economy; see Bronsard and Wagneur (1982), Jean P. Drèze (1982), Picard (1982) or Roberts (1982). Obviously, concepts are now available to pose well-defined problems, tools and techniques are available to analyse them.