Hicks-Kaldor Optimality
Law and Economics-Charles W. Upton
Optimality
• Pareto Optimality. A change is good if
– At least one party is made better off
– No party is made worse off.
Hicks Kaldor Optimality
Hicks-Kaldor Optimality
Hicks Kaldor Optimality
Optimality
• Pareto Optimality. A change is good if
– At least one party is made better off
– No party is made worse off.
• Hicks Kaldor Optimality. A change is good
if
– The gains to the winners exceed the losses to
the losers.
Hicks Kaldor Optimality
Optimality
• Pareto Optimality. A change is good if
– At least one party is made better off
– No party is made worse off.
The winners
could is good
• Hicks Kaldor Optimality.
A change
compensate the losers and
if
make
this a Pareto
– The gains to
the winners
exceed Optimum
the losses to
Change
the losers.
Hicks Kaldor Optimality
An Example
• John works for Sam for 40 hours.
– He loses leisure worth $200
– He grows crops which Sam sells for 300.
Hicks Kaldor Optimality
An Example
• John works for Sam for 40 hours.
– He loses leisure worth $200
– He grows crops which Sam sells for $300.
– If John gets paid $200-$300, it is Pareto
Optimal for him to work for Sam.
Hicks Kaldor Optimality
An Example
• John works for Sam for 40 hours.
• Suppose John doesn't get paid.
Hicks Kaldor Optimality
An Example
• John works for Sam for 40 hours.
• Suppose John doesn't get paid.
– That is not Pareto Optimal.
Hicks Kaldor Optimality
An Example
• John works for Sam for 40 hours.
• Suppose John doesn't get paid.
– That is not Pareto Optimal.
– It is Hicks Kaldor Optimal. A payment of
$200-$300 would have left both better off.
Hicks Kaldor Optimality
Lake Restful
• The town of Lake Restful decides to make
some lake improvements, which are worth
$10 per resident. The cost per resident is
only $5.
Hicks Kaldor Optimality
Lake Restful
• The town of Lake Restful decides to make
some lake improvements, which are worth
$10 per resident. The cost per resident is
only $5.
• Lake Restful levies a cigarette tax. Since
only 1/4 of the residents smoke, the
smokers end up paying $20 each.
Hicks Kaldor Optimality
Lake Restful
• The town of Lake Restful decides to make
non-smokers
get $10
some lake The
improvements,
which
are of
worth
benefits,The
andcost
the per
Smokers
getis
$10 per resident.
resident
$10 of net costs
only $5.
• Lake Restful levies a cigarette tax. Since
only 1/4 of the residents smoke, the
smokers end up paying $20 each.
Hicks Kaldor Optimality
Lake Restful
• The town of Lake Restful decides to make
non-smokers
get $10
some lake The
improvements,
which
are of
worth
benefits,The
andcost
the per
Smokers
getis
$10 per resident.
resident
$10 of net costs
only $5.
Not
Paretolevies
Optimal
• Lake
Restful
a cigarette tax. Since
only 1/4 of the residents smoke, the
smokers end up paying $20 each.
Hicks Kaldor Optimality
Lake Restful
• The town of Lake Restful decides to make
non-smokers
get $10
some lake The
improvements,
which
are of
worth
benefits,The
andcost
the per
Smokers
getis
$10 per resident.
resident
$10 of net costs
only $5.
Not
Paretolevies
Optimal
• Lake
Restful
a cigarette tax. Since
only 1/4 of the residents smoke, the
Optimal
smokersHicks-Kaldor
end up paying
$20 each.
Hicks Kaldor Optimality
Acme Paper Mill
• Acme Paper Mill, located along Lake
Restful, is allowed to operate and discharge
$100 of pollutants into the water.
Hicks Kaldor Optimality
Acme Paper Mill
• Acme Paper Mill, located along Lake
Restful, is allowed to operate and discharge
$100 of pollutants into the water.
• It would cost $200 to clean up the mess.
Hicks Kaldor Optimality
Acme Paper Mill
• Acme Paper Mill, located along Lake
Restful, is allowed to operate and discharge
$100 of pollutants into the water.
• It would cost $200 to clean up the mess.
• Acme is allowed to begin operations
without paying compensation to the
residents.
Hicks Kaldor Optimality
Acme Paper Mill
• Acme Paper Mill, located along Lake
Restful, is allowed to operate and discharge
$100 of pollutants into the water.
• It would cost $200 to clean up the mess.
NotisPareto
Optimal
• Acme
allowed
to begin operations
without paying compensation to the
residents.
Hicks Kaldor Optimality
Acme Paper Mill
• Acme Paper Mill, located along Lake
Restful, is allowed to operate and discharge
$100 of pollutants into the water.
• It would cost $200 to clean up the mess.
NotisPareto
Optimal
• Acme
allowed
to begin operations
without paying compensation to the
Hicks-Kaldor Optimal
residents.
Hicks Kaldor Optimality
The Stop Sign
• Cars go through the intersection at Third
and Main without any stop sign
Hicks Kaldor Optimality
The Stop Sign
• Cars go through the intersection at Third
and Main without any stop sign
• There are accidents. The town installs a stop
sign.
Hicks Kaldor Optimality
The Stop Sign
• Cars go through the intersection at Third
and Main without any stop sign
• There are accidents. The town installs a stop
sign.
• While most benefit, the few coming from
Third are inconvenienced, and on balance
are net losers.
Hicks Kaldor Optimality
The Stop Sign
• Cars go through the intersection at Third
and Main without any stop sign
• There are accidents. The town installs a stop
sign.Not Pareto Optimal
• While most benefit, the few coming from
Third are inconvenienced, and on balance
are net losers.
Hicks Kaldor Optimality
The Stop Sign
• Cars go through the intersection at Third
and Main without any stop sign
• There are accidents. The town installs a stop
sign.Not Pareto Optimal
• While most benefit, the few coming from
Third
are inconvenienced,
Hicks-Kaldor
Optimal and on balance
are net losers.
Hicks Kaldor Optimality
The Defense
• This is the test used.
Hicks Kaldor Optimality
The Defense
• This is the test used.
• The transactions cost of ensuring that every
stop sign installed is Pareto Optimum is
enormous.
Hicks Kaldor Optimality
The Defense
• This is the test used.
• The transactions cost of ensuring that every
stop sign installed is Pareto Optimum is
enormous.
• While we lose from particular stop signs,
we are almost certainly net beneficiaries of
stop signs.
Hicks Kaldor Optimality
Three Options
• Installing stop signs without paying
compensation.
• Installing stop signs and paying
compensation (and bearing the transactions
costs).
• Not installing stop signs at all
Hicks Kaldor Optimality
Three Options
• Installing stop signs without
Optionpaying
One is Probably
compensation.
Better for us than Two or
• Installing stop signs and payingThree
compensation (and bearing the transactions
costs).
• Not installing stop signs at all
Hicks Kaldor Optimality
End
©2004 Charles
W. Upton
Hicks Kaldor Optimality