On the relationship between the Hicksian measures of change in welfare and the Pareto principle

Abstract

The change of welfare for one individual can be measured by the compensating variation (CV) or equivalent variation; the change for a whole society can be evaluated by summing up the individual gains and losses (e.g. Σ CV). Generally there is no equivalence between the positive sign of this sum and a potential improvement for all individuals by redistribution of incomes. In this paper the Σ CV-measure is corrected in a manner such that the new measure is equivalent to the Pareto principle. This correction is defined in a general equilibrium framework and takes into account the attainability of allocations. Finally characterizations of compensation tests are derived.