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Kaldor-Hicks Efficiency

Kaldor-Hicks efficiency in welfare economics is a criterion for judging reallocations of resources among individuals, resulting in gains to some but losses to others. This criterion is an attempted improvement on—and development of—the Pareto criterion. Kaldor-Hicks efficiency is fundamental to social cost-benefit analysis and sheds light on some business ethics issues.

The Pareto criterion specifies that there is an improvement in efficiency if at least one party gains while no other party loses from reallocation. An improvement is a Pareto superior move, while loss to any party is a Pareto inferior move. Pareto efficiency occurs when no possible superior move exists. Dissatisfaction with the criterion reflects that there may be few practical opportunities for no-loser changes.

A reallocation is a Kaldor-Hicks improvement if individuals gaining from a ...

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