Law and Economics-Charles W. Upton 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 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. Hicks Kaldor Optimality. A change is good if –The gains to the winners exceed the losses to the losers. The winners could compensate the losers and make this a Pareto Optimum Change

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 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. The non-smokers get $10 of benefits, and the Smokers get $10 of net costs

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. The non-smokers get $10 of benefits, and the Smokers get $10 of net costs Not Pareto Optimal

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. The non-smokers get $10 of benefits, and the Smokers get $10 of net costs Not Pareto Optimal Hicks-Kaldor Optimal

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. Acme is allowed to begin operations without paying compensation to the residents. Not Pareto Optimal

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. Not Pareto Optimal Hicks-Kaldor Optimal

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. While most benefit, the few coming from Third are inconvenienced, and on balance are net losers. Not Pareto Optimal

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. Not Pareto Optimal Hicks-Kaldor Optimal

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 paying compensation. Installing stop signs and paying compensation (and bearing the transactions costs). Not installing stop signs at all Option One is Probably Better for us than Two or Three

Hicks Kaldor Optimality End ©2004 Charles W. Upton