Economics • Economic BasicsHard
In welfare economics, what does the 'Scitovsky Criterion' attempt to resolve?
A. The ambiguity and inconsistency of the Kaldor-Hicks compensation test by checking if a movement from one state to another is mutually advantageous.✓ Correct Answer
B. The exact measurement of consumer surplus when demand curves are upward sloping.
C. The determination of fair wages in a monopsonistic labor market.
D. The allocation of public goods using voluntary revelation mechanisms.
💡 Solution & Explanation
The Scitovsky Criterion resolves the logical inconsistencies of the Kaldor-Hicks compensation test by asserting that a policy change is socially desirable only if the gainers can compensate the losers and, simultaneously, the losers cannot bribe the gainers to revert to the initial state. This double criterion ensures that paradoxical welfare conclusions are avoided when evaluating economic policy shifts. It remains a foundational concept in welfare economics and cost-benefit analysis.
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