Modern welfare economics builds on this by putting incentive constraints at centre stage. Among the seminal contributions are Mirrlees (1971) and Hammond (1979). This analysis dispenses with the assumption that lump-sum transfers are feasible because of the incentive problems that they create. The appropriate benchmark for government is second best Pareto efficiency, taking into account appropriate restrictions on policy instruments. A whole tradition of policy analysis in this vein has been developed (see, for example, Atkinson and Stiglitz (1980)).