Kaldor–Hicks efficiency
Kaldor-Hicks efficiency is a way of evaluating decisions to see if they are fair. It looks at if the benefits of making a decision (or taking action) outweigh the costs.
To explain Kaldor-Hicks efficiency, let's use a pretend swimming pool example.
Let's say a group of people in a town want to build a new swimming pool. Some people think it's a great idea, while others don't think it's worth the money.
Kaldor-Hicks efficiency looks at both sides of the decision to figure out if it is fair.
First, it looks at who will benefit from the decision (the people who want to build a pool). Let's say that if the pool is built, these people will get to enjoy a nice new swimming pool. The benefit for them is the joy of having a pool.
Next, it looks at who will be worse off because of the decision (the people who don't think the pool is worth it). Let's say these people will be unhappy because they will have to pay money towards building the pool, but they won't get to use it. The cost for them is the money they have to pay.
Then, Kaldor–Hicks efficiency uses a formula to figure out if the people who benefit (the people who want a pool) get more joy out of the pool than the people who are worse off (the people who don't want it) lose from having to pay for it.
If the joy of having a pool is greater than the money people have to pay, then the decision to build the pool is Kaldor-Hicks efficient, because the benefits outweigh the costs. This means that the decision is fair.
If the joy of having a pool is less than the money people have to pay, then the decision to build the pool is not Kaldor-Hicks efficient, because the costs outweigh the benefits. This means that the decision is not fair.
So, Kaldor–Hicks efficiency helps us figure out if a decision is fair by looking at who will benefit from it and who will be worse off because of it, and then calculating if the benefits are greater than the costs.
To explain Kaldor-Hicks efficiency, let's use a pretend swimming pool example.
Let's say a group of people in a town want to build a new swimming pool. Some people think it's a great idea, while others don't think it's worth the money.
Kaldor-Hicks efficiency looks at both sides of the decision to figure out if it is fair.
First, it looks at who will benefit from the decision (the people who want to build a pool). Let's say that if the pool is built, these people will get to enjoy a nice new swimming pool. The benefit for them is the joy of having a pool.
Next, it looks at who will be worse off because of the decision (the people who don't think the pool is worth it). Let's say these people will be unhappy because they will have to pay money towards building the pool, but they won't get to use it. The cost for them is the money they have to pay.
Then, Kaldor–Hicks efficiency uses a formula to figure out if the people who benefit (the people who want a pool) get more joy out of the pool than the people who are worse off (the people who don't want it) lose from having to pay for it.
If the joy of having a pool is greater than the money people have to pay, then the decision to build the pool is Kaldor-Hicks efficient, because the benefits outweigh the costs. This means that the decision is fair.
If the joy of having a pool is less than the money people have to pay, then the decision to build the pool is not Kaldor-Hicks efficient, because the costs outweigh the benefits. This means that the decision is not fair.
So, Kaldor–Hicks efficiency helps us figure out if a decision is fair by looking at who will benefit from it and who will be worse off because of it, and then calculating if the benefits are greater than the costs.