Kaldor - Hicks Efficiency (with example)

[@LivingEconomics]

Please note @ 1 minute of the video I meant to say Pareto Improvement under pareto efficiency

[@juliaanna327]

The Hicks Kaldor efficiency implies that those who gain from a decision should be able to compensate the losses of losers. The unit of measuring this loss is not utility, rather, it is money. Therefore, social utility is not maximized and instead, the wealth of the people would be maximized. The criterion for assessing this increase of wealth is the willingness of the beneficiaries to pay the money through market prices. But this price is uncertain because prices are never fixed and it also has to be applied to an imaginary situation. This computational problem poses a challenge in adequate compensation as well utility creation.

[@juancarloscuestas1321]

Nice video. Very clear. Thanks Anu!

[@cmahones03]

Thanks, this was a super helpful video!

[@aryaasing.h]

Welcome back 🎉

[@rammylevy2436]

much better than my professor!! Thnx!!

[@LivingEconomics]

🙏

[@ecofun263]

Thanks aot... Understand the whole chapter with basic examples ❤️❤️🙏🙏

[@surajvel4827]

Very informative

[@rupaveenas6782]

According to Pareto improvement, a change in the allocation of resources should benefit at least one person and should not harm anyone. However, this is not ideal to measure efficiency as it is known that when one person gains, the other person should lose. According to Kaldor-Hicks efficiency, efficiency of a decision is measured based on whether the losers are compensated by the people who gain on such a move from the net gain. However, it is unclear if the losers get fairly compensated. Also, it might not always be a monetary loss, losers can lose something else besides that. For example, 'A' has an ancestral home in a small town. He lives in a city, however, he loves his home at the town as it holds a lot of memories of his grand parents. One day the Government decides to demolish the his ancestral home to construct highways. While this might benefit many, what 'A' is losing is something which cannot be compensated with just monetary value. Therefore, it can be extremely unfair to certain individuals. But to conclude, pareto improvement cannot be used to measure the efficiency of a decision, Kaldor-Hicks efficiency at least gives a compensation to the losers.

[@isabellapanepucci2496]

you explained this so much better than my professor. thanks for saving my butt

[@LivingEconomics]

Humbled!

[@ANJALIBASKAR-mr1nm]

The problem with Kaldor-Hicks efficiency is that it assumes that compensation may be given to those who lose out in a theoretical sense, in practice it may not. Local residents would feel unfairly treated if the airport went ahead. Kaldor-Hicks criteria can lead to an increase in inequality and be perceived as unfair. For example, those under flight path may feel it is unfair they have been singled out to have to put up with an airport nearby. It places economic welfare and total economic utility above other moral considerations. It prioritises utilitarianism v. notions of fairness, but overall it is better than Pareto Improvement, as it at least solidifies clearly a concept of compensation to those worse-off.

[@SMGNAVEEN]

❤

[@amigoash3326]

Great👍

[@rivkavermeij]

Thank you :)

[@LivingEconomics]

You're welcome!

[@anirudhjain3633]

Very helpful ma'am

[@LivingEconomics]

Thanks a lot