The 'Compensation Criterion' which says that state A is socially preferable to state B, if those who gain from the change can compensate the loosers and yet end up with surplus welfare gain is attributed to:
Understanding the Compensation Criterion in Welfare Economics
The question asks about the economist associated with the 'Compensation Criterion'. This criterion is a concept used in welfare economics to evaluate whether a change from one economic state (State B) to another (State A) leads to an improvement in overall social welfare, even if some individuals are made worse off by the change.
Defining the Compensation Criterion (Kaldor Criterion)
The Compensation Criterion, also known as the Kaldor Criterion, states that a change is socially desirable if those who gain from the change can hypothetically compensate those who lose, and the gainers still end up better off after the compensation. It is important to note that actual compensation does not need to take place; the criterion only requires that the potential exists for the gainers to compensate the losers and still retain some net gain.
This criterion provides a way to evaluate changes that might not be Pareto improvements (where at least one person is better off and no one is worse off), by focusing on whether the total benefits outweigh the total costs, measured in terms of potential compensation.
Nicholas Kaldor's Contribution to Welfare Economics
The 'Compensation Criterion' as described in the question, which focuses on the potential for gainers to compensate losers and still achieve a surplus welfare gain, is specifically attributed to Nicholas Kaldor. Kaldor proposed this criterion in 1939 as a practical test for judging the desirability of economic changes, particularly those resulting from policy interventions like trade liberalization or public projects.
| Economist | Related Criterion/Concept | Brief Description |
|---|---|---|
| W. Pareto | Pareto Optimality / Pareto Efficiency | A state where no individual can be made better off without making someone else worse off. A Pareto improvement makes at least one person better off without making anyone worse off. |
| N. Kaldor | Kaldor Criterion (Compensation Principle) | A change is an improvement if those who gain could potentially compensate those who lose and still have a net gain. |
| T. Scitovsky | Scitovsky Criterion (Double Criterion) | A refinement of Kaldor-Hicks. A change from A to B is an improvement if gainers from B can compensate losers, AND losers from A cannot compensate gainers to prevent the move to B. |
| Bergson | Bergson-Samuelson Social Welfare Function | A function that ranks social states based on individual preferences, providing a framework for evaluating social welfare changes. |
Analysing the Options
Let's look at the given options in the context of the Compensation Criterion:
- W. Pareto: Associated with Pareto Optimality and Pareto improvements, a stricter criterion requiring no one to be worse off.
- N. Kaldor: Proposed the Compensation Criterion, focusing on the potential for gainers to compensate losers.
- T. Scitovsky: Developed the Scitovsky Criterion, a refinement addressing the possibility of reversals under the Kaldor-Hicks criterion.
- Bergson: Known for work on Social Welfare Functions, a broader concept for evaluating social welfare.
Based on the definition provided in the question, where the focus is on the potential compensation by gainers leading to a surplus gain, this is precisely the Compensation Criterion attributed to N. Kaldor.
Conclusion: The Economist Behind the Compensation Criterion
The 'Compensation Criterion' which states that state A is socially preferable to state B if those who gain from the change can compensate the loosers and yet end up with surplus welfare gain is directly associated with N. Kaldor.
Revision Table: Key Welfare Concepts
| Criterion/Concept | Attributed to | Core Idea |
|---|---|---|
| Pareto Improvement | W. Pareto | At least one person better off, no one worse off. |
| Kaldor Criterion (Compensation) | N. Kaldor | Potential for gainers to compensate losers and retain surplus. |
| Hicks Criterion | J.R. Hicks | Similar to Kaldor; focuses on whether losers could bribe gainers not to make the change. Often combined as Kaldor-Hicks. |
| Scitovsky Criterion | T. Scitovsky | Requires both Kaldor and Hicks criteria to be met for a non-reversible welfare improvement. |
Additional Information on Welfare Criteria
The Compensation Criterion (Kaldor) and the Bribe Criterion (Hicks) are often grouped together as the Kaldor-Hicks efficiency criteria. These criteria attempt to provide a basis for evaluating economic changes that have both winners and losers, moving beyond the strict limitations of Pareto efficiency. While they offer practical benefits for policy analysis, they also face criticisms, such as issues related to income distribution and the actual lack of compensation.
Important Questions from Economy
The Five Year Plan was first launched in
Which of the following was/were the feature(s) of Lenin’s New Economic Policy (NEP) for the Soviet Union?
1) Private retail trading was strictly forbidden
2) Private enterprise was strictly forbidden
3) Peasants were not allowed to sell their surplus
4) To secure liquid capital, concessions were allowed to foreign capitalists, but the State retained the option of purchasing the product of such concerns
Select the correct answer using the code given below:
Which one of the following was set as a target of average growth of GDP of India over the plan period 2012-2017 by the Approach Paper to the Twelfth Five year Plan?
In ________ economies, all productive resources are owned and controlled by the government.
Private ownership of the means of production is a feature of a _______ economy.
