The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Compensation Principle

  • John S. Chipman
Reference work entry


The compensation principle holds that one of two possible states constitutes an improvement over the other if the gainers could compensate the losers for their losses and still be at least as well off as in the original state. The conflict between potentiality and actuality – one situation is judged better than another if everybody could be made better off in the new situation even though some in fact become worse off – ensures that the compensation principle does not allow for value-free policy decisions.


Autarky Baldwin envelope Barone, E. Bergson–Samuelson social-welfare function Bickerdike, C. F. Cairnes, J. E. Compensation principle Competitive equilibrium Consumer surplus Cost–benefit analysis Deadweight loss Debreu, G. Dupuit, A.-J.-E. J. Exchange Excise taxes Free trade Fundamental theorem of welfare economics Gains from trade Game theory General equilibrium Hicks, J. R. Hotelling, H. Ideal money Income-compensation function Interpersonal utility comparisons Kaldor, N. Kuznets, S. Lerner, A. P. Little, I. M. D. Lump sum taxes Marshall, A. Mishan, E. J. Monopoly New welfare economics Optimal tariffs Pantaleoni, M. Pareto optimality Partial equilibrium Pigou, A. C. Proportional income tax Revealed preference Ricardo, D. Robbins, L. C. Samuelson, P. A. Scitovsky indifference surface Scitovsky, T. Taxation of income Transferable utility Utility-possibility frontier Value judgements Viner, J. 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John S. Chipman
    • 1
  1. 1.