MG.3. Consider a starting allocation of money between persons A and B, each of w
ID: 1136214 • Letter: M
Question
MG.3. Consider a starting allocation of money between persons A and B, each of whom cares only about money. Person A begins with $10 and B begins with $10. For each of the following alternative allocations, classify them (relative to the starting allocation) as: a Kaldor-Hicks improvement only, a Pareto Improvement only, a K-H improvement and Pareto Improvement, or neither a K-H nor Pareto Improvement. MG.3.a MG.3.b MG.3.c MG.3.d MG.3 e A: $10 A: $9 A: $8 A: $9.5 A: $9.5 B: $12 B: $12 B: $11 B: $10,000 B: $9.5Explanation / Answer
Allocation is
So, any Pareto improvement is also a Kaldor-hicks improvement.
Pareto improvement
Kaldor-hicks improvement
reason
3.a.
Yes
Yes
Person A is not made worse off while making person B better-off
3.b.
No
Yes
Person A is made worse off while making person B better off.
Person B can give person A $1 resulting in Pareto improvement.
3.c.
No
No
Person A is made worse off while making person B better off.
Person B can’t give to compensate enough person A.
3.d.
No
Yes
Person A is made worse off.
Person B can give person A enough to compensate resulting in Pareto improvement.
3.e.
No
No
Both are made worse-off.
Pareto improvement
Kaldor-hicks improvement
reason
3.a.
Yes
Yes
Person A is not made worse off while making person B better-off
3.b.
No
Yes
Person A is made worse off while making person B better off.
Person B can give person A $1 resulting in Pareto improvement.
3.c.
No
No
Person A is made worse off while making person B better off.
Person B can’t give to compensate enough person A.
3.d.
No
Yes
Person A is made worse off.
Person B can give person A enough to compensate resulting in Pareto improvement.
3.e.
No
No
Both are made worse-off.
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