Answered: In Chapter 1 we examined two efficiency…

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Price-searcher Markets With Low Entry Barriers

Section: Chapter Questions

Problem 10CQ

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In Chapter 1 we examined two efficiency criteria: Pareto efficiency and Kaldor Hicks efficiency. Recall that Pareto allows projects to go forward only if losers are fully compensated, whereas Kaldor-Hicks allows them to proceed as long as aggregate benefits exceed costs, or if B > C (that is, compensation of losers is not required). According to Michelman’s (1967) criterion, projects can go forward if B C > min(S, D), where, recall, S are settlement costs and D are demoralization costs. Given this formula, explain why Michelman is more permissive than Pareto but less permissive than Kaldor Hicks.

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