What is Kaldor’s compensation principle? How is it used to resolve Pareto non-comparability? How is it different from Hick's compensation principle?

Nicholas Kaldor was the first economist to give a welfare criterion based on compensating payments. Kaldor’s criterion helps us to measure the welfare implications of a movement in either direction on the contract curve in terms of Edgeworth box diagram.

According to Kaldor’s welfare criterion, if a certain change in economic organisation or policy makes some people better off and others worse off, then a change will increase social welfare if those who gain from the change could compensate the losers and still be better off than before. In the words of Prof. Baumol, “Kaldor’s criterion states that a change is an improvement if those who gain evaluate their gains at a higher figure than the value which the losers set upon their losses.”

Thus, if any policy change benefits any one section of the society (gainers) to such an extent that it is better off even after the payment of compensation to the other sections of the society (losers) out of the benefits received, then that change leads to increase in social welfare. In Kaldor’s own words, “In all cases…. where a certain policy leads to an increase in physical productivity and thus of aggregate real income… it is pos­sible to make everybody better off ________ ____ _________ ____ ______ ___ ___ ______ __________.
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