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 --> good). -- Jim Devine "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
