The analysis of welfare economics is built around the concept of Pareto efficiency. However, this efficiency criterion does not always represent a satisfactory answer. Other times, certain optimality conditions cannot be satisfied, and therefore Pareto efficiency simply cannot be reached. 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’ll learn about some of these criteria, in order to understand them and being able to use them. In this LP we’ll learn about:

*Pareto efficiency*, the cornerstone of welfare economics.

**Compensation criteria**

*Definition*: what they are and how to use them. More precisely, we’ll talk about:

*Kaldor’s criterion*, *Hicks’ criterion*, *Scitovsky’s criterion*, *Little’s criterion*, and *Samuelson’s criterion*.

**Theory of the…**

*Second best*, a theory by economists Kelvin Lancaster and Richard Lipsey.