THE USE OF THE MEASURES OF ECONOMIC SURPLUS IN COST‐BENEFIT ANALYSIS

Abstract

In cost‐benefit analysis the test that is most commonly adopted in order to apply the compensation principle is the Kaldor‐Hicks test, which is also referred to as the strong compensation test. This seeks to determine whether, after a policy move has taken place and new relative prices have been established, the gainers could hypothetically compensate the losers and still be collectively better off than before. Attention is also paid, in theory but seldom in practice, to the possibility of a Scitovsky paradox. This would arise if the Kaldor‐Hicks criterion is satisfied for both the policy move itself and its reversal. The Scitovsky double test can then be introduced in order to reject a policy move which produces such a result. A move passes this test if it both satisfies the Kaldor‐Hicks criterion in the forward direction and does not satisfy it in reverse.

Citation

PLATTS, A.R. (1978), "THE USE OF THE MEASURES OF ECONOMIC SURPLUS IN COST‐BENEFIT ANALYSIS", Journal of Economic Studies, Vol. 5 No. 2, pp. 133-145. https://doi.org/10.1108/eb008077