#### 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…

The Hicks criterion is a *compensation criterion* developed by *John Richard Hicks *in his paper “The Valuation of the Social Income”, 1940. It is similar to that of *Kaldor’s*, with different implications although with the same limitations. In this criterion, state Y is preferred to X, if there is not a potential reassignment that turns X into Xˈ, that is at least as good as Y in *Pareto terms*. 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 it increases for individual B. Due to this, individual A should compensate individual B so the change of states does not happen, going from X to X’, which will increase B’s utility as much as going from X to Y, while the drop in A’s utility would not be as large. The same would happen if moving from Y to X. Since this ex-ante compensation is possible, neither X is preferred to Y nor Y will be preferred to X.

When moving from state Y to Z, again individual A´s utility decreases while it increases for individual B. When going from Y to Z, there is no possible compensation from individual A to individual B, since to the left of Y the utility possibility frontier is always higher. Individual A therefore can not compensate individual B, so Z is preferred to Y in Hicks’ terms. However, when comparing movement from Z to Y, the opposite logically occurs. Individual A’s utility increases while individuals B’s decreases. Individual B would compensate individual A going from Z to Z’ , and hence Y is not preferred to Z.

If we compare this with Kaldor’s criterion we see some significant changes but still both criteria fall under the *Scitovsky paradox*. This paradox is centred in the phenomenon that while Y can be preferred to X the opposite can also be true. This does not give a truly asymmetric result as it could just mean that going back to the initial situation is preferred. The economy would therefore oscillate between both points.