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compensation principle


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The welfare criterion that a change in the economy is beneficial if the gainers could afford to compensate the losers. This is known as the Hicks–Kaldor principle, from its originators. It is subject to the criticism that if the gainers could afford to compensate the losers, but do not in fact do so, and the new distribution of real incomes and structure of relative prices are different from the old, the same criterion could sometimes be passed by a change back to the old situation.

Subjects: Economics.


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