The Kaldor–Hicks Potential Compensation Principle and the Constant Marginal Utility of Income

Stephen Martin ()

Review of Industrial Organization, 2019, vol. 55, issue 3, No 7, 493-513

Abstract: Abstract The Kaldor–Hicks potential compensation principle underlies partial equilibrium welfare analysis in imperfectly competitive markets. It depends on the assumptions that changes in consumer and producer surplus are weighted equally and that the marginal utility of income is constant. I show that if the first assumption is followed but there is decreasing marginal utility of income, the potential compensation principle does not give satisfactory indications of market performance.

Keywords: Kaldor–Hicks; Potential compensation; Marginal utility of income (search for similar items in EconPapers)
JEL-codes: D61 L13 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11151-019-09716-3

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