Suppose there are two individuals. Level of good h can be determined only by individual 1 and it has a positive externality on individual 2. To find Pareto efficient allocation, we add the utilities of both individuals and then maximise. How do we find a Kaldor-Hicks efficient allocation? Or given an allocation how do we determine if it is Kaldor-Hicks efficient? Can we say that if the given allocation is not Pareto optimal then it is definitely not Kaldor-Hicks optimal?

  • $\begingroup$ There is no information on the endowments or budget constraints of both individuals. If player 1 can choose any level of $h$ say $a$, he can also choose $a+1$, hence there is always room for improvement wrt both criteria. $\endgroup$ – Grada Gukovic Nov 17 '19 at 11:31

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