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      Question

      The Kaldor-Hicks compensation criterion for evaluating a

      policy change is considered an improvement over the Pareto criterion primarily because:
      A It requires actual compensation to be paid, making it more equitable than the Pareto criterion Correct Answer Incorrect Answer
      B It allows welfare comparisons across policies where some agents gain and others lose, which the Pareto criterion cannot handle, at the cost of ignoring distribution Correct Answer Incorrect Answer
      C It resolves the Scitovsky paradox by requiring both the winners and losers to pass the compensation test simultaneously Correct Answer Incorrect Answer
      D It is equivalent to maximising a Bergson-Samuelson social welfare function with equal weights Correct Answer Incorrect Answer

      Solution

      The Pareto criterion requires no one to be made worse off — highly restrictive for real policy. Kaldor-Hicks (potential Pareto improvement): a policy is an improvement if gainers could hypothetically compensate losers and still be better off. Actual payment is NOT required. This allows real-world policy evaluation at the cost of ignoring distributional consequences. Why others are wrong: • (A) — Kaldor-Hicks requires only potential, not actual, compensation. • (C) — Describes the Scitovsky double criterion, which corrects the Kaldor-Hicks paradox, not resolves it. • (D) — Equal-weighted SWF is a separate utilitarian concept.

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