Which of the following describes a situation where an

Solution

Solution: The Kaldor-Hicks Criterion (or Kaldor-Hicks efficiency) states that a policy change is an improvement if the gainers could, in principle, compensate the losers and still be better off. It is satisfied when the sum of the willingness-to-pay (WTP) of the gainers is greater than the sum of the required compensation (WTA) of the losers. The Scitovsky Paradox (or Scitovsky Reversal) arises when a change from state A to state B satisfies the Kaldor-Hicks Criterion, but the reversal from state B back to state A would also satisfy the Kaldor-Hicks Criterion. This means the move from A to B is beneficial (according to KH), but the subsequent move back from B to A is also beneficial (according to KH), implying ambiguity. Option A perfectly describes this:

• The first part ("gainers can fully compensate the losers and still be better off") satisfies the Kaldor-Hicks Criterion (A to B is efficient).
• The second part ("the losers would still be able to bribe the gainers back to the original state") means the reversal (B to A) also satisfies the Kaldor-Hicks Criterion, which is the definition of the Scitovsky Paradox.