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Kaldor-Hicks and Pareto Efficiency in the Age of Global Disruption

TitleKaldor-Hicks and Pareto Efficiency in the Age of Global Disruption
Publication TypeConference Proceedings
Year of Publication2018
AuthorsRidic, G, Ridic, O
Number of Volumes4
Date Published04/2018
PublisherSEDEF BOSNIA d.o.o.
Place PublishedInternational University of Sarajevo (IUS), Faculty of Business Administration, Sarajevo, Bosnia and Herzegovina
ISSN Number2566-2856
KeywordsEconomic Trade Efficiency, Global Exchange, Kaldor-Hicks Efficiency., Pareto Efficiency, Social Welfare Economics

This aim of this review paper is to study the effects of globalization using a prism

lens of Pareto and Kaldor-Hicks notions of efficiency. Theories in social welfare

economics use specific types of efficiency to evaluate allocation systems. A system

is called Pareto optimal if no exchange can be made that will make one person better

off without making someone else worse off. In economics, a change in the allocation

of resources is said to be Kaldor-Hicks efficient when it produces more benefits than

costs. Pareto efficiency occurs when at least one person is made better off and no

one is made worse off. In the real world, however, it is very difficult to make any

change without making at least one person worse off. Under the Kaldor-Hicks

efficiency assessment, an outcome is efficient if those who are made better off could

in theory compensate those who are made worse off and so produce a Pareto

efficient outcome. Although all Kaldor-Hicks efficient situations are Pareto optimal,

in that no further Pareto improvements can be made, the reverse is not true.

Conversely, although every Pareto improvement is a Kaldor-Hicks improvement,

most Kaldor-Hicks improvements are not Pareto improvements. This analysis can be

extended to examine the winners and losers from the process of globalization and

the associated economic and political consequences. In methodological sense this

paper depicts a detailed of multifaceted secondary sources (e.g. government and

corporate publications, peer-reviewed journal articles, internet sources, etc.)

Government policy actions generate winners and losers, even if aggregate (total)

welfare improves overall. As far as (free) international trade is concerned, potential

losers can exert political pressure to thwart policies that increase economic

efficiency. This paper develops a framework in which politics in the global economy

revolve around continuing competition between the winners and the losers generated

by global economic exchange. As economists since the 18th century have indicated,

global exchange raises aggregate social welfare. Global exchange creates winners

and losers. For some, global exchange brings greater wealth and rising incomes; for

others, however, the international economy brings job losses and lower incomes.

The winners and losers compete to influence government policy. Those who profit

from global exchange encourage governments to adopt policies that facilitate such

exchange; those harmed by globalization encourage governments to adopt policies

that restrict it. This competition is played out through domestic politics, where it is

mediated by domestic political institutions.

Refereed DesignationRefereed