Kaldor-Hicks Criterion
Kaldor-Hicks Criterion
Kaldor-Hicks Criterion
Assumptions:-
1. An individual himself is the best judge of his satisfaction which is
independent of the satisfaction of others.
2. There is constancy of the tastes of the individuals.
3. There can be ordinal measurement of utility.
4. The inter-personal comparisons of utilities are not possible.
5. There is an absence of externalities in production and consumption.
Suppose there are two economic situation A and B. The former is socially
preferable to B, in case those who gain from A can compensate the losers i.e.
they can bribe the losers to accept the situation A and can still be better off
than in situation B. For instance, the chemical factory in an area causes
suffering to the people in its vicinity but the factory management compensates
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them and still the total product obtained by the society is more than what it
would have been, had the factory been closed, there is a net increase in the
welfare of the society.
In the given figure, A’s utility is measured along the horizontal scale and B’s utility
along the vertical scale. RS is the utility possibility curve. It indicates the different
combinations of the utilities obtained by A and B. The movement downwards
along the curve RS shows an increase in the utility of A and a fall in the utility of B.
On the opposite, an upward movement along RS curve shows a fall in the utility of
A and a rise in utility of B. these movements along the utility possibility curve may
be on account of redistribution of income.
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Suppose the two individuals A and B are initially at the point C inside
the utility possibility curve. If some change takes place in the economic policy and
A and B moves to position D from C, there is a fall in the utility of A whereas there
is an increase in the utility of B. It is not possible to evaluate the movement from
C to D from Paretian criterion. The points E, F and G lying upon EF segment of the
utility possibility curve RS are socially preferable to the point C on the basis of
Paretian criterion as at least one individual becomes better off while none is
worse off at the points E,F and G. As there is movement from C to D, it has to be
seen if the individual B (the gainer) can compensate the individual A (the loser)
and still be better off than C.
Criticism:-
1. This criterion implicitly assumes that marginal utility of money is the same
for all the individuals in the society.
2. It suggested potential compensation rather than actual compensation. In
case the potential compensation is not paid, the welfare would be
measured only in terms of utility and that would require the inter personal
comparisons of utility and value judgements.
3. It evaluates the gains and losses due to an economic change in money
terms. The real value of gains and losses have been overlooked.
4. It ignores the existing distribution of income of the community. If the
income distribution is unequal, the compensation by the gainers (the rich)
paid out to losers (the poor) will fail to offset the loss on account of the
differences in the marginal utility of money in case of the rich and the poor.
Thank You
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