#### Summary

The analysis of welfare economics is built around the concept of Pareto efficiency. However, this efficiency criterion does not always represent a satisfactory answer. In order to solve this problem, and to find a new way to establish which allocation is best, economists have been since searching for new criteria to make a more informed decision. In this Learning Path we learn about some of these criteria.#### Compensation criteria:

- Definition
**Kaldor’s criterion**- Hicks’ criterion
- Scitovsky’s criterion
- Little’s criterion
- Samuelson’s criterion

#### Theory of the…

he Kaldor criterion is a *compensation criterion* developed by *Nicholas Kaldor* in his paper “Welfare Propositions of Economics and Interpersonal Comparisons of Utility”, 1939. This criterion is satisfied if state Y is preferred to state X and there is such a compensation and reassignment that Y turns to Yˈ that is at least as good as X in a *Pareto sense*. In the following graph we consider the *utility* of two individuals (A on the x-axis and B on the y-axis), which we will compare using the utility possibility frontier of two different moments.

When moving from state X to Y, individual A’s utility decreases, while individual B’s increases. Individual B is willing to compensate individual A and move to Yˈ where both increase their initial utility. The opposite, moving from Y to X, can also occur if the winner, this time individual A, compensates the looser, individual B, and is willing to relocate to Xˈ.

When moving from state Y to Z, the utility of individual A decreases, while individual B’s increases. Individual B is willing to compensate individual A and go to Zˈ where both increase their initial utility. On this case the opposite, moving from Z to Y, would not be feasible.

Tibor Scitovsky pointed out some inconsistencies and the consequent limitations of this criterion which are known as the *Scitovsky paradox*. This paradox is centred in the phenomenon that while Y can be preferred to X the opposite can also be true, as it was previously explained. This does not give a truly asymmetric result as it could just mean that going back to the initial situation is preferred. Economy would therefore oscillate between both points.