The Genealogy of Modern Theoretical Public Economics: From First Best to Second Best

The development of second best modelling in the seventies has shaped modern theoretical public economics. The paper discusses some key changes in the economists' conceptions. The first two sections examine the efficiency- equity dilemma. The study of non convexities has shown that counterintuitive "efficiency enhancing" income redistribution might occur. The introduction of asymmetric information has shed doubts on virtues of lump-sum compensation. The last sections focus on the intricate geometry of second best optimisation and the ambiguous value of the signals provided by the price system outside a first best world.