The compensation criteria also known as the New Welfare Economics have been formulated by Hicks, Kaldor and Scitovsky. Finally, why don't we compromise on this issue? To speak of a K-H efficient allocation as a social optimum is therefore inaccurate. After compensation one can move from D to Q1. But even then, someone is very likely to slip through the cracks. Any points on it or below it are feasible.
First of all, concerning the issue of transitivity, Kaldor-Hicks would suggest that a policy with higher net benefits is preferable to a policy with lower net benefits, and is indifferent between two policies with equal net benefits. How does that sound to you? After all, I think that an encyclopedia should be as such that anybody could open to a page and understand what they're reading, but also believe that it should not be too restrictive to omit important details. As I said, this is the reason for having the criterion in the first place. The asymmetry of either one of the criteria is also well-demonstrated, so I'm reverting this part of your edit. Our tutors are highly qualified and hold advanced degrees. Why would I want to weight the preferences of murderers and pedophiles equally to my own? Thus, under Kaldor—Hicks efficiency, a more efficient outcome can in fact leave some people worse off. It arises when people use resources to effect the transfer of other resources.
I'm reverting to the original phrasing because it is both correct and nicely phrased. If I value a good more than you but I don't have anything that you want enough for us to be able to trade, then this allocation is Pareto efficient redistributing the good anyway would make me better off, but at the cost of making you worse off. K-H efficiency naturally gives rise to another concept: deadweight costs. What makes the Potential Pareto Improvement arguably efficient is that a sufficiently large transfer of Good X from A to B will move the allocation from the Potential Pareto improvement to a Pareto improvement: the Final allocation above. Then, if there exists an element in the new set U', u1, which both individuals would prefer to u0, then this policy change - moving from U to U' - satisfies the K-H criteria. This is because, at any given point along the production possibilities frontier, no one person can be made better off without making at least one person worse off.
A trade is potential Pareto superior if at the final allocation, one person gains more than the other person loses. Utilitarianism is often used to justify redistribution, but even on its own terms, this doesn't necessarily follow. Use in policy-making The Kaldor—Hicks methods are typically used as tests of Pareto efficiency rather than as efficiency goals themselves. However, while all Pareto efficient allocations are Kaldor-Hicks efficient, the reverse is not true. But I don't believe that the fact that something is on google scholar alone should merit its inclusion.
Tell me what you think. Essentially, you could if transactions costs of arranging compensation were zero. Which factors determine this amount? If we implement the removal of the tariff, should the consumers compensate the producers? Implicitly, these types of examples are assuming constant utility functions, which is unrealistic. Conversely, though every Pareto improvement is a Kaldor-Hicks improvement, most Kaldor-Hicks improvements are not Pareto improvements. If I have the watch, the situation is K-H and Pareto efficient.
The key difference is the question of compensation. Now pick an element of U, u0, a particular outcome from the initial Pareto frontier. A simple test for an improvement of welfare according to the Kaldor-Hicks criterion is that the initial bundle should lie below the utility possibility curve representing the new bundle. Since little believes that value judgements are essential in welfare economics, he bases his criterion on two value premises. The link I provided to the paper that says otherwise works fine here, so maybe you can give it another shot. Theft is a transfer, but resources time, tools, etc.
Similarly, you can know that something makes me very happy even if I have a low willingness to pay for it. I think the exact phrasing of the section about the difference is still suboptimal, but at least it's correct now. This means, that a movement from state A to state B must be desirable in terms of the Kaldor-Hicks criteria but a return from B to A should not be an improvement on these criteria. But the thing is, some people are douchebags. Sometimes Kaldor-Hicks improvements are referred to as Kaldor-Hicks efficient, and the same is true of the discussion of Pareto. Con: Someone has to decide who the douchebags are and what good behavior means, and maybe this decider ends up being the douchebag and the whole system is messed up bc a loser got elected to public office and is legislating what they think is good but which is in fact stupid.
However, some believe that in practice, it is almost impossible to take any social action, such as a change in economic policy, without making at least one person worse off. Pareto improvements are a small subset of Kaldor—Hicks improvements. That's what the criticism section is there for. Like I said, I'm doing this from memory so it might not be 100% correct. For example, a voluntary exchange that creates pollution would be a Kaldor—Hicks improvement if the buyers and sellers are still willing to carry out the transaction even if they have to fully compensate the victims of the pollution. A re-allocation is a Kaldor—Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome. Let's assume the classical Crusoe and Friday economy with two goods, coconuts and fish and both people having Cobb-Douglas utility functions.
Further, this Pareto optimality will result, no matter what the income distribution consequences of the change are. Slight variant - a situation is Pareto efficient if there is no way to make everyone better off. We're ranking hypothetical utility allocations. Kaldor-Hicks states that, under a Kaldor-Hicks improvement, a Pareto improvement could be achieved given the proper transfers, not that it will be achieved. Although Kaldor-Hicks efficiency is often used as synonymous with maximizing social welfare, there are in fact various other ideas about social welfare that propose other criteria maximin to name just one.
Here, I think the person who created the graph wanted to illustrate the fact that Pareto improving allocations are a subset of Kaldor-Hicks improvements. However, while every Pareto improvement is a Kaldor-Hicks improvement, most Kaldor-Hicks improvements are not Pareto improvements. A court could determine whether to imply a term or use a vitiating doctrine if it knew the initial allocation, the preferences of the contracting parties, and the final allocation. As regards the K-H vs. Pareto efficiency requires making every party involved better off or at least no worse off. However, a corollary is that the pie can also shrink! This is how I think of the K-H criteria and I'm pretty sure it's right.