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Kaldor-Hicks Criterion

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PPGPortal > Home > Concept Dictionary > K, L, M > Kaldor-Hicks Criterion
 

Kaldor-Hicks Criterion

A theoretical test which can be used to assess whether a cost-benefit analysis supports a public project. According to this criterion, the people who benefit must be able, in principle, to fully compensate the people who are harmed by the project.

(About.com on Economics. http://economics.about.com/library/glossary/bldef-hicks-kaldor-criterion.htm) 

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This criterion identifies potential Pareto improvements as those that, assuming that net gainers could fully compensate losers, would leave at least one person better off without anyone else worse off.

It is important to note that this criterion does not mean that the gainers from a policy will actually compensate those harmed. The test that must be passed is merely that the gainers could fully compensate those harmed, by transferring some of the benefits to which they received as a result of the policy. In short, the Kaldor-Hicks criterion requires that the benefits received by the "winners" of a policy exceed the harm done to the "losers" who are harmed by the policy.

     

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