{"id":82588,"date":"2020-09-23T09:00:00","date_gmt":"2020-09-23T03:30:00","guid":{"rendered":"https:\/\/data-flair.training\/blogs\/?p=82588"},"modified":"2021-03-19T15:54:12","modified_gmt":"2021-03-19T10:24:12","slug":"economics-modern-welfare-criteria","status":"publish","type":"post","link":"https:\/\/data-flair.training\/blogs\/economics-modern-welfare-criteria\/","title":{"rendered":"Modern Welfare Criteria – Hicks and Kaldor Welfare Criteria, Scitovsky\u2019s Paradox, Arrow\u2019s Impossibility Theorem"},"content":{"rendered":"

This criterion studies the conditions under which the general equilibrium exists. It examines the conditions for economic efficiency in the production of output, exchange of commodities, and equity in distribution.<\/p>\n

It further looks upon the optimal allocation of inputs among the commodities and of the commodities among the consumers in the market. Let us learn more about Modern Welfare Criteria.<\/p>\n

\"Modern<\/a><\/p>\n

Modern Welfare Criteria<\/h2>\n

Hicks and Kaldor Welfare Criteria<\/h3>\n

The compensation principle of the Hicks and Kaldor Criterion states that \u201c if a change makes some people better off and the others worse off, then that change will increase the social welfare if those who gain from the change could compensate the losers and still be better off.\u201d<\/p>\n

In other words, a change is considered to be an improvement if the losers can not bribe the winners to not bring the change.<\/p>\n

Assumptions of Hicks and Kaldor\u2019s Welfare Criteria<\/h4>\n
    \n
  1. The satisfaction of an individual is independent of other\u2019s opinions.<\/li>\n
  2. In both production or consumption, externalities do not exist.<\/li>\n
  3. The individual\u2019s taste remains constant.<\/li>\n
  4. Ignorance of the issue of distribution.<\/li>\n
  5. Utilities can be measured ordinally for a person.<\/li>\n
  6. Interpersonal comparisons of utility are not possible.<\/li>\n<\/ol>\n

    \"Assumptions<\/a><\/p>\n

     <\/p>\n

    Here, let the initial stage be Q. Now, if a change has been proposed to R then, there will be a change in the utility of B and no change in the utility of A. The movement from Q to R is a Pareto movement.<\/p>\n

    This further means that a movement of Q to any point between R and S will be a Pareto movement.<\/p>\n

    \"<\/a><\/p>\n

    Now if a change is proposed from Q to T, it means that the utility of B will increase and that of A will decrease.<\/p>\n

    So, this is not a Pareto movement. We would call it to be a Kaldor movement if, in this change, B can compensate A and still be better off. Any movement on UPC from inside the UPC is a Kaldor movement.<\/p>\n

    However, the Kaldor movement does not require B to compensate A.<\/p>\n

    Criticism of the Compensation Principle<\/h4>\n

    It is said that the model is not free from the value judgments since the compensation is merely hypothetical. And that it will be labeled as a change even if it makes the poor the poorer.<\/p>\n

    It is also not free from interpersonal comparisons as well as compensation of a small amount can bring about a large change in the utility of the poor.<\/p>\n

    However, Kaldor and Hicks claim that they have separated the production changes from the distribution changes.<\/p>\n

    But, if we say that the output of X increases and the output of Y decreases, and an individual A prefers X and individual B prefers Y, then the question of production becomes interlinked with that of distribution.<\/p>\n

    Scitovsky\u2019s Paradox<\/h3>\n

    \"Scitovsky\u2019s<\/a><\/p>\n

    Scitovksy pointed out one of the important contradictions in the Hick-Kaldor criteria. He proved that in some of the cases, a situation A can be shown as Kaldor improvement over the B, and at the same time, B can be shown as the Kaldor\u2019s improvement over A.<\/p>\n

    In this case, point C is a clear improvement over point B. This happens because UB remains unchanged when UA increases.<\/p>\n

    However, it is possible to move C to A by a mere redistribution of income. Therefore, B is a Kaldor improvement over A. This is called the Scitovsky\u2019s paradox, which will arise whenever UPC\u2019s intersect.<\/p>\n

    Scitovsky\u2019s Double Criteria of Improvement<\/h4>\n

    \"Scitovsky\u2019s<\/a><\/p>\n

    Scitovsky says that a change is an improvement if the winners can bribe off the losers to accept the change. And at the same time, the losers are not able to bribe off the winners to accept the change.<\/p>\n

    We can see in the figure that, G is a Kaldor improvement over Q. But, this cannot be vice versa.<\/p>\n

    Samuelson\u2019s Criticism of Scitovsky<\/h4>\n

    \"Samuelson\u2019s<\/a><\/p>\n

    In the above graph, S is a Kaldor improvement over Q. It also satisfies Scitovsky\u2019s double criteria. But, Samuelson argues that a full test of improvement in welfare requires that the new UPC shall not lie inside the old UPC at any given point.<\/p>\n

    Arrow\u2019s Impossibility Theorem<\/h3>\n

    Arrow believed that the principles are defined for social welfare, it is not always necessary for them to hold in the actual situations. Arrow\u2019s impossibility theorem states that \u2019 a clear order of preferences cannot be determined while adhering to mandatory principles.\u2019<\/p>\n

    Arrow believes that amongst the following given situations, all of them don\u2019t need to hold in a real market situation. The assumptions are –<\/p>\n