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
Date Published04/2018
Number of Volumes4
Publication Languageeng
AuthorsRidic, G, Ridic, O
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 prismlens of Pareto and Kaldor-Hicks notions of efficiency. Theories in social welfareeconomics use specific types of efficiency to evaluate allocation systems. A systemis called Pareto optimal if no exchange can be made that will make one person betteroff without making someone else worse off. In economics, a change in the allocationof resources is said to be Kaldor-Hicks efficient when it produces more benefits thancosts. Pareto efficiency occurs when at least one person is made better off and noone is made worse off. In the real world, however, it is very difficult to make anychange without making at least one person worse off. Under the Kaldor-Hicksefficiency assessment, an outcome is efficient if those who are made better off couldin theory compensate those who are made worse off and so produce a Paretoefficient 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 beextended to examine the winners and losers from the process of globalization andthe associated economic and political consequences. In methodological sense thispaper depicts a detailed of multifaceted secondary sources (e.g. government andcorporate 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, potentiallosers can exert political pressure to thwart policies that increase economicefficiency. This paper develops a framework in which politics in the global economyrevolve around continuing competition between the winners and the losers generatedby global economic exchange. As economists since the 18th century have indicated,global exchange raises aggregate social welfare. Global exchange creates winnersand losers. For some, global exchange brings greater wealth and rising incomes; forothers, however, the international economy brings job losses and lower incomes.The winners and losers compete to influence government policy. Those who profitfrom global exchange encourage governments to adopt policies that facilitate suchexchange; those harmed by globalization encourage governments to adopt policiesthat restrict it. This competition is played out through domestic politics, where it ismediated by domestic political institutions.

Refereed DesignationRefereed