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Review of Industrial Organization

, Volume 55, Issue 3, pp 493–513 | Cite as

The Kaldor–Hicks Potential Compensation Principle and the Constant Marginal Utility of Income

  • Stephen MartinEmail author
Article

Abstract

The Kaldor–Hicks potential compensation principle underlies partial equilibrium welfare analysis in imperfectly competitive markets. It depends on the assumptions that changes in consumer and producer surplus are weighted equally and that the marginal utility of income is constant. I show that if the first assumption is followed but there is decreasing marginal utility of income, the potential compensation principle does not give satisfactory indications of market performance.

Keywords

Kaldor–Hicks Potential compensation Marginal utility of income 

JEL Classification

D61 L13 

Notes

Supplementary material

11151_2019_9716_MOESM1_ESM.pdf (120 kb)
Supplementary material 1 (pdf 119 KB)

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Purdue UniversityWest LafayetteUSA

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