Talk:Kaldor-Hicks efficiency

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I dont use Wikipedia a lot, but on the Kaldor-Hicks page it said Pareto efficiency is impossible in most case. From what i know most exchanges are pareto efficient. please explain how you can say most exchange are inefficeint? why would anyone make an inefficient exchage? by definition if you exchange something its becuase you think you will get at least as much utility, which is pareto efficient. (p.s. i edited the main page, becuase thats what wikipedia is about...right?)

Regarding the previous paragraph: I removed the stuff you added about most changes being Pareto efficient and weakened the claim about the impossibility of making changes anyway, adding "some believe" and "large changes such as economic policy changes." Kg6cvv 21:43, 20 June 2006 (UTC)

I do not feel that many lay folks would fully understand this article. I would love for the article to be made more accessible. -- anonymous

"A Kaldor-Hicks improvement is any alternative that increases the economic value of social resources": this strikes me as a strange definition, which makes a number of (perhaps questionable?) assumptions about what "economic value" means, about the possibility of a coherent notion of "the economic value of social resources" simpliciter, etc. In fact a Kaldor-Hicks improvement is a much more formally defined notion, as defined in the body of the article.

If no one convinces me otherwise in the next few days, and I don't forget, I'm going to replace the first paragraph with something along the lines of "Kaldor-Hicks efficiency (named for Nicholas Kaldor and John Hicks) is a type of economic efficiency that captures some of the intuitive appeal of Pareto efficiency, while having less stringent criteria and therefore being applicable in more circumstances." Or something like that. -- Orbst 18:18, 13 Jun 2005 (UTC)

Analysis has been excellent. But the Marxist critique should be highlighted.

I had to change it again, i added "However, most exchanges by definition are Pareto efficient since they would not voluntarily be entered unless they were mutually beneficial." with out this it sounds like Pareto efficientcy is nearly useless when infact i find it to be the more common form to be used in economics. I hope that this line works for the both of us.

Like the general direction the changes are going in, but now the order is screwed up. I think Pareto should go first and then be contrasted with K-H so I'm changing that again 86.80.156.143 13:54, 23 June 2006 (UTC)


I can't edit the talk section. anyway i was the one that 1) added the bit about mutually beneficial exchanges, 2) changed the Kaldor/Pareto order. I figured since the article is about Kaldor it should go first. Someone that knows nothing about either would like to read what Kaldor is before another form is defined. --I am adamant about keeping the change in substance, but the change in order are just my personal feelings, change it if you think it would be better.

Contents

[edit] looks like a mistake

quote from article

"Since any Kaldor-Hicks efficient allocation maximizes social welfare, it must necessarily be the case that any Kaldor-Hicks efficient allocation is also Pareto efficient. This is because, at any given point along the production possibilities frontier, no one person can be made better off without making at least one person worse off. However, while every Pareto improvement is a Kaldor-Hicks improvement, most Kaldor-Hicks improvements are not Pareto improvements."

I don't think this makes sense - it seems to be saying first that a KH improvement is pareto efficient, then that they aren't. Either it should be made coherent, or the distinction should be made clear - Charles

Yeah, I think this is wrong as well. First "maximizes social welfare" is always relative to the Social Welfare Function used. For example if you have a Rawlsian SWF then SW goes up whenever the welfare of the least-well of member goes up. So if you give 1$ to the least-well of guy and take away 1000$ from everyone else (assuming the ordering of incomes doesn't change) this would be a SW improvement according to Rawls but would not satisfy the KH criteria since the least well off guy could not compensate, in theory or otherwise, everyone else. I think whoever wrote that had in mind a *particular* social welfare function for which the statement may be true (at least the first part). I think the last sentence is correct though trivially so. If someone is made better off without anyone else being made worse off then obviously the winner can compensate the losers since there aren't any. Deleting the para.radek 05:23, 8 February 2007 (UTC)

quote from article: "While all Kaldor-Hicks efficient situations are Pareto efficient, the reverse is not true. Conversely, though every Pareto improvement is a Kaldor-Hicks improvement, most Kaldor-Hicks improvements are not Pareto improvements."

I think it should be: "While all Pareto efficient situations are Kaldor-Hicks efficient, the reverse is not true."

I think you are incorrect. There are plenty of situations where a Pareto efficient allocation is not Kaldor-Hicks efficient, indeed that is why the compensation principle was invented in the first place. If I value a good more than you but I don't have anything that you want enough for us to be able to trade, then this allocation is Pareto efficient (redistributing the good anyway would make me better off, but at the cost of making you worse off). The compensation principle holds, however, that since I value the good more than you do, redistribution should take place, because I could potentially compensate you for your loss. Only after the redistribution has taken place will the allocation be Kaldor-Hicks efficient. It will also still be Pareto efficient as when no Kaldor-Hicks improvements are possible, neither are Pareto improvements.
Unless you guys disagree, I'm changing it back. RoyalTS

RoyalTS, you can't say "if I value a good more than you" because you cannot compare how much people value something, only whether or not one person values it more than they value something else. Just because I value your car more than $3000 and you value it less than $3000 and I end up buying your car from you for $3000, that doesn't mean that I value the car more than you do, it could mean you value the $3000 more than I do and we value the car the same, or even that you value the car and the $3000 more than I do because I have 10 cars and you're dirt poor, but you need to eat. Kg6cvv 21:43, 20 June 2006 (UTC)

Kg6cvv, that's what the Kaldor-Hikcs efficiency is all about, it allows inter-personal comparisions of untility.

[edit] Criticism

This:

"One problem with the K-H criterion is that it will conclude that any change that results in an increase in income will lead to Pareto optimality. Further, this Pareto optimality will result, no matter what the income distribution consequences of the change are."

is wrong. Kaldor-Hicks states that, under a Kaldor-Hicks improvement, a Pareto improvement could be achieved given the proper transfers, not that it will be achieved.

Also, this:

"At a more technical level, various versions of the K-H criteria lack desirable formal properties. For instance, Tibor Scitovsky demonstrated that the Kaldor criterion alone is not symmetric: it's possible to have a situation where an outcome A is an improvement (according to the Kaldor criterion) over outcome B, but B is also an improvement over A. The combined Kaldor-Hicks criterion does not have this problem, but it can be non-transitive (A may be an improvement over B, and B over C, but A may not be an improvement over C)."

is wrong as well. Kaldor-Hicks is "transitive" (if the net benefits are higher, then it is preferable to lower net benefits), and I don't know who had the idea that it is not.Jackson744 17:17, 3 March 2006 (UTC)

Methinks you are wrong, at the very least on your last point. This is hardly my area of expertise, but a quick search through the journals reveals several articles that speak of this intransitivity (take this one, for example: http://www.springerlink.com/link.asp?id=vew2t8j6d6tdfaqw ). The asymmetry of either one of the criteria is also well-demonstrated, so I'm reverting this part of your edit.
As for your second change, I don't know, because the way the sentence was phrased originally is kind of confusing. If I'm not mistaken the only point that's made is that Kaldor-Hicks pays no attention to the distribution of income, just to aggregate income. Please correct me if I'm wrong.
Furthermore, I do not understand why you reverted my change concerning all Kaldor-Hicks efficient situations being Pareto efficient, but not vice versa. I've already laid out the rationale for this, so I would really appreciate it if you could explain why you think this is wrong. RoyalTS
First of all, concerning the issue of transitivity, Kaldor-Hicks would suggest that a policy with higher net benefits is preferable to a policy with lower net benefits, and is indifferent between two policies with equal net benefits. There is absolutely no room for intransitivity, because the very criteria of K-H preclude this possibility. Your link does not work, and based on the fact that I (and I hold a graduate-level degree in economics) know this to be a false critique of K-H, I am going to revert.
Secondly, the reaqson why I reverted your change is the fact that all Kaldor-Hicks improvements are not Pareto improvements. You have it backwards. All Pareto improvements are Kaldor-Hicks improvements. A Kaldor-Hicks improvement implies that the net social benefit has increased, while Pareto efficiency implies that at least some are better off, while nobody is worse off. Therefore, K-H is necessary for Pareto efficiency, but not sufficient.
The only criticism I've heard of K-H is that it ignores the distributional impacts of policies, which is why I left the criticism which I did.Jackson744 17:54, 5 March 2006 (UTC)
If you know this to be a false critique of K-H, would you mind sharing a reference to a paper that shows this to be the case? The link I provided to the paper that says otherwise works fine here, so maybe you can give it another shot.
I am 100% in agreement with the way you put the relationship between Kaldor-Hicks and the Pareto criterion in this discussion, but the article does not reflect this. It says "While all Pareto efficient situations are Kaldor-Hicks efficient, the reverse is not true." If Kaldor-Hicks efficient means no more Kaldor-Hicks improvements are possible, then a Pareto efficient allocation is not necessarily Kaldor-Hicks efficient. As I said, this is the reason for having the criterion in the first place. In contrast, all Kaldor-Hicks efficient allocations are automatically Pareto-optimal, so the statement has it exactly backward. Notice that the sentence following the one I quoted is exactly right.
Thirdly, you removed the criticism as regards the distribution of income. If you do agree with it, why don't you put it back in? Moreover, I see that the sentence about the Scitovsky criterion got lost as well. Would you care to justify? RoyalTS 20:17, 5 March 2006 (UTC)
What I've removed from the criticisms section was, one, something which was inaccurate (it claimed that any Kaldor-Hicks improvement would lead to a Pareto improvement, which is not true at all). The portion of the criticisms which I have left deals with the issue of distribution, and thus, I felt that I would not need to add any additional information. I've also removed the part about transitivity, which I believe to be false. As I've explained, I've never heard such a contention, and I've explained why I don't see how it could be the case, but if you or anybody could explain to me why it would be the case in a language that is accessible to the average reader, then I'll agree that it should be included. At any rate, I, holding a Master's degree in economics, have never heard any such contention, and if a person with a Masters in economics hasn't heard of such an objection, it's unlikely to be relevant to the typical encyclopedia reader even if it is true. I think it's unlikely that it really needs to be included.
As for the other contention, you've got things backwards. Pareto improvements are, by definition, Kaldor-Hicks improvements, but Kaldor-Hicks improvements need not be Pareto improvements. As I've said, if at least some people are better off and nobody is worse off (Pareto improvement), then the net social benefit is positive, and it's also a Kaldor-Hicks improvement. If, on the other hand, the net social benefit is positive (Kaldor-Hicks improvement), then it need not be the case that sopme people are not worse off (Pareto improvement). In fact, I think I may add an image to the article soon to clear up the issue.Jackson744 23:28, 5 March 2006 (UTC)
No, what you have removed is not only what you said you removed, but all criticism except for one paragraph. You removed loads of stuff which was completely accurate. Moreover, what is left does not at all deal with the issue of distribution, but instead deals with the cardinality of the social welfare functions based on K-H. Moreover, I fail to see anything wrong with the sentence about the Scitovsky criterion. Please look at the changelog and reread what you deleted!
You previously claimed that you KNEW the transitivity criticism to be false, now you're saying that you have never heard of such a claim which is quite a different thing. As I said, a 2 minute search with Google Scholar reveals several articles in peer-reviewed journals which speak of just this intransitivity and I have linked to one, are you really simply going to cite your credentials to support your view? I'm more than willing to accept your edit if you can back it up with some evidence, but so far I have yet to see any. And just because you have never heard of such a contention does not mean it should not be included in the article. I doubt the majority of Master students in economics ever deal with game theory as in depth as it is explained in Wikipedia, I would not even be surprised if a substantial part of Bachelor students have never heard the term "Kaldor-Hicks", let alone its formal properties...
As regards the K-H vs. Pareto criterion, please read my previous comments carefully. I never disagreed with what you have been saying in this discussion. I know that Pareto IMPROVEMENTS are K-H improvements, but not vice versa. But this is not what the article says: "While all Pareto EFFICIENT situations are Kaldor-Hicks EFFICIENT, the reverse is not true". It does not speak of IMPROVEMENTS, it speaks of SITUATIONS. And in this case, a situation that is Kaldor-Hicks efficient is also Pareto efficient, precisely because if there are no more K-H improvements left this automatically means neither are Pareto improvements per your explanation. Conversely, the reverse is not true as should be self-evident.
I like the idea of a picture. What were you thinking about? RoyalTS 23:56, 5 March 2006 (UTC)
Here's my stance on the whole transitivity issue: I own the textbook "Cost-Benefit Analysis" by Boardman, Greenberg et. al., which I used for both undergrauate and graduate work. I've studied CBA pretty extensively, and I work with it regularly. In neither the book nor any of the classes (which did both extensively cover Kaldor-Hicks), nor my use of CBA since, have I ever encountered this objection. Now I'm not completely unwilling to believe that it may be a valid criticism - as I stated, if it can be explained to me in such a manner as counter my intuition on the matter (which I've stated above), then I will believe that it's valid. However, it was not explained whatsoever in the article before. Why is it intrasitive - give an example of why it might not be, because it seems to me that a policy in which society is better off is preferred to one in which a society is at the status quo, and would be indifferent between two policies under which society is equally well off. I'll even be willing, in that case, to say that it should go into the article, although I'm questionable to what utility it could possibly be for 99% of readers who might want to use the article. But I don't believe that the fact that something is on google scholar alone should merit its inclusion. For example, googling, "'Kaldor-Hicksintransitive'" nets about 80 sites, many of which do not discuss the issue you've raised. The same goes with "nontransitive" and "transitivity". There just aren't that many hits, and most of the hits are sites in which the two words merely appear together coincidentally. Certainly, the sites which do appear do not constitute any sort of consensus on the matter, and coupled with the fact that I've never heard this objection, I really question its merit. Even so, it did not explain the objection, which I think it must do to merit inclusion. It merely confuses if it isn't properly explained. So why is it intransitive?
As for the issue of Kaldor-Hicks "situations", you're right - any Kaldor-Hicks efficient allocation must be Pareto efficient, that's my mistake. I think I misread the article because you talk about improvements in the same spot in which you talk about efficiency. I'll try to make that a little clearer.
As for the picture, I was thinking of including a map in 2D space of the utility of two individuals, showing Pareto and Potential Pareto frontiers, as well as all possible Pareto and Kaldor-Hicks improvements.Jackson744 02:24, 6 March 2006 (UTC)
Far be it for me to claim that I actually understand the technical details of this matter, but a more thorough search at JSTOR reveals this article which formally deals with the transitivity issue: http://links.jstor.org/sici?sici=0020-6598%28197810%2919%3A3%3C547%3ATNWE1%3E2.0.CO%3B2-S (hope you have access, otherwise tell me and I'll send you the paper). Given the fact that the proof for the existence of such problems is so formal, I tend to agree with you that explaining it properly will not be interesting to 99% of people. So shall we simply mention it in one sentence and refer to the paper for details?
I can't quite picture the 2D map you propose yet, but the idea of illustrating the difference between Pareto and K-H criterion seems worthwhile. Do you mean a sort of Edgeworth box?
I think the exact phrasing of the section about the difference is still suboptimal, but at least it's correct now. Maybe I'll give it a shot sometime. Feel free to revert if you don't like it. RoyalTS 05:02, 6 March 2006 (UTC)
OK, I've added the picture. Tell me what you think. Also, I'm OK with adding a sentence about the intransitivity with a link to the paper. Was there anything else you think needs to be added/changed? I've also added in the part about the intransitivity in the criticisms section.Jackson744 16:03, 6 March 2006 (UTC)
Wait a sec, it's still wrong: "Since any Kaldor-Hicks efficient allocation maximizes social welfare, it must necessarily be the case that any Kaldor-Hicks efficient allocation is also Pareto efficient. However, while all Pareto efficient allocations are Kaldor-Hicks efficient, the reverse is not true." The second part says exactly the opposite of the first. I'm reverting to the original phrasing because it is both correct and nicely phrased. Unless we're going to expand on our description of WHY this is so, I think we should leave it like this.
Moreover "Tibor Scitovsky', having shown the intrasitivity of the Kaldor criterion, suggested combining the two, into what we now call the Kaldor-Hicks criteria." is not factually correct. What Scitovsky showed were reversals, not intransitivity.
I also cannot find in the document you linked (nice explanations, BTW!) that it was Paul Samuelson who discovered the intransitivity, if I understand it correctly, it was Gorman who discovered them, Samuelson proposed a solution. I'm reverting back to the original. Give it another look, it really is a quite sensible, easily understandable explanation. And inclluding the link you added gives people that want to read more a good reference. I'm not too familiar with Wikipedia rules, but shouldn't this link be in a Reference section at the bottom of the page?
I like the picture. For someone with some basic training in econ, this should be easily understandable! RoyalTS 21:14, 6 March 2006 (UTC)
Well, I think it's OK, but the lines which you reverted about K-H efficient "situations" and "improvements" needs to be modified to make it less confusing. The reason why I edited it in the first place is that I though it was stating that K-H improvements are Pareto improvements, due to the fact that it's too scrunched up. As for the transitivity portion, I also think that it's a bit confusing, and am going to attempt to re-phrase it to make it a bit more accessible. But otherwise, it's OK.Jackson744 21:27, 6 March 2006 (UTC)
Well, besides the fact that it is factually incorrect again now ("However, while all Kaldor-Hicks efficient allocations are Pareto efficient, the reverse is not true."), I disagree that your version is in any way clearer than the previous one; if anything it is now more confusing . There is little need to refer to as loaded a term as social welfare and the production possibilities frontier is certainly kind of confusing.
And please, let's just leave the criticism as it was. It's a perfectly correct and understandable explanation and I don't know why you insist on kicking out valuable content. Yes, for the uninitiated it is hard to understand, but the paragraph begins with "at a more technical level" so that should be ample warning. And it provides the exact reason why a combined criterion was necessary in the first place. RoyalTS 21:52, 6 March 2006 (UTC)
You're right about the inaccuracy, so I've fixed it. I think it's good now. Like I said, this is fine. The old way is not useful to the vast majority of users. Most people who would ostensibly be looking up, "Kaldor-Hicks" don't need that degree of detail, and it's only going to confuse them.Jackson744 01:17, 7 March 2006 (UTC)
I've said before, but I'll say it again that I think your use of "social welfare" is confusing at best and wrong at worst. Although Kaldor-Hicks efficiency is often used as synonymous with maximizing social welfare, there are in fact various other ideas about social welfare that propose other criteria (maximin to name just one). To speak of a K-H efficient allocation as a social optimum is therefore inaccurate. I would also appreciate if you could explain "This is because, at any give point along the PPF, no one person can be made better off without making at least one person worse off.". This does not appear self-evident to me at all.
And again I'll make the point again that this article does not have to be dumbed down in its entirety. I'm very much in favor of providing an explanation of the basic concept that even laymen would understand, but it is not completely unlikely that someone with a basic understanding of economcis might use this article and to those people at least identifying the technical problems of the criteria has value. RoyalTS 05:23, 7 March 2006 (UTC)
A hypothetical Kaldor-Hicks efficient allocation of resources is one under which an economy lies along its PPF. The Kaldor-Hicks criteria implicitly assume that this implies that social welfare is maximized. I fear that it would begin to border on pedantry to make no reference of the fact that K-H efficiency ostensibly maximizes social welfare in an article on K-H. That's what the criticism section is there for.
As for the issue of any point lying along the PPF, look at any graph of a PPF and you can see that's it's impossible for any allocation along that line to allow for a Pareto improvement. You spoke eariler of an edgeworth box, so therefore you must be familiar with the fact that a PPF is constructed from all points along a contract curve.
Finally, why don't we compromise on this issue? We can leave in my simpler explanation (which I think is a lot more accessible to the average reader) and add yours with your preface that it is of more technical detail? That seems reasonable to me. After all, I think that an encyclopedia should be as such that anybody could open to a page and understand what they're reading, but also believe that it should not be too restrictive to omit important details. How does that sound to you? I'll make the edit now.Jackson744 06:36, 7 March 2006 (UTC)
Hmmm, I can't say that I'm completely satisfied, but I guess that's the nature of a compromise. I'm just saying that explaining this is possible without ever mentioning the words "social welfare" and if it can be avoided then it should be.
Question though (I'm honestly interested, it's been a while since I had my last micro class): Even only using Pareto efficiency as a criterion, are all points on the PPF of equal social value. Let's assume the classical Crusoe and Friday economy with two goods, coconuts and fish and both people having Cobb-Douglas utility functions. Can the corners of the joint PPF, for example, in which both produce only coconuts or only fish really be Pareto optimal? Sure, there is efficiency in production, but utility for both agents is zero. What am I missing? RoyalTS 07:35, 7 March 2006 (UTC)
Well, you're mising the allocative efficient side of the more inclusive top-level efficiency. If both produce all of one and the other produces all of the other (assuming each has a comparative advantage to produce one or the other), and they make all possible mutually beneficial trades (barring the traditional market failures), then you'll have both allocative and productive efficiency, both of which are necessary to achieve a broader top-level efficiency. Now there are concerns about what distribution this might lead to given some exogenously-determined endowment, but those are subjective concerns of justice and fairness, and as K-H and Pareto attempt to establish an objective means of determining "social welfare", they generally ignore these sorts of concerns.Jackson744 08:27, 7 March 2006 (UTC)

The latest edit now claims that K-H disregards externalities which is wrong. Indeed K-H forms the basis for both the Coasian and the Pigouvian solution to the externality problem. RoyalTS 19:29, 16 April 2006 (UTC)

[edit] Improvements vs. efficiency

I think the article's use of "efficient" vs. "more efficient" and the like is extremely sloppy. Sometimes Kaldor-Hicks improvements are referred to as Kaldor-Hicks efficient, and the same is true of the discussion of Pareto. This is confusing because the article (correctly) notes that all Kaldor-Hicks efficient worldstates are Pareto-efficient worldstates, so it sounds like Kaldor-Hicks and Pareto are the same thing. What makes Kaldor-Hicks different from Pareto is that not all Kaldor-Hicks improvements are Pareto improvements. So I think the article needs to be rewritten to make it clear when it is talking about efficiency improvements (which need not lead to an outcome that is efficient, only one that is "more efficient") and when it is talking about actual efficiency (in which case Kaldor-Hicks and Pareto are the same). Elliotreed 19:07, 13 January 2007 (UTC)

[edit] Improvements vs efficiency and a name change suggestion

I agree that there is a need for rewriting.

Any situation where a Kaldor-Hicks improvement is not possible is automatically Pareto efficient because a Pareto efficient situation is a situation where no Pareto improvement is possible and the set of possible Pareto improvements is always a subset of the set of possible Kaldor-Hicks improvements. Also, except in more exotic and, typically, specially constructed examples, it will tend to be true that a Pareto efficient situation will not provide opportunities for a Kaldor-Hicks improvement.

Hence, the Kaldor-Hicks efficiency concept is somewhat redundant, although can be mentioned, as it contributes very little in comparison with the concept of Pareto efficiency (as a Kaldor-Hicks efficient situation is Pareto efficient). Strictly speaking, the Kaldor-Hicks set of efficient possibilities (in a set of possibilities) will be a subset of the set of Pareto efficient possibilities. In practice, without it being an exotic example, the two sets will be the same.

Therefore, I suggest that the title should be changed to ‘Kaldor-Hicks criterion’ as the substance of the idea is the existence of Kaldor-Hicks improvements that are not Pareto improvements. This expands the scope of what sort of changes can be considered as 'generally' welfare improving. The rationale is that there are lots of changes that raise income on average although each one may make some worse off and others better off, however, with any luck the accumulation of such changes will tend to cancel out in terms of their redistributive effect and therefore everyone will end up better off (a Pareto improvement). In practice, the accumulation of changes doesn't necessarily cancel out in terms of redistribution, but adverse changes to income distribution, it is argued, can still be addressed by other policy measures. [Feel free to use or modify any of this text.]

I also suggest that a more relevant text is found as the reference for this welfare criterion. Although I haven't read this particular book of Posner, and Posner is well worth reading, his focus in the book would not be on the basics of welfare criteria, hence, a good reference text on welfare economics should be used. I suggest getting hold of: Welfare Economics and Social Choice Theory (2nd Ed) by Allan M. Feldman, and Roberto Serrano

--203.214.15.223 (talk) 19:29, 29 March 2008 (UTC)