What is Compensation Principle? Show how by using the compensation principle one could improve the welfare of society and consider the situation Pareto improvement?

What is Compensation Principle? Show how by using the compensation principle one could improve the welfare of society and consider the situation Pareto improvement?

 

 

Answer:

Compensation principle states that a Pareto optimal outcome can be achieved if the winners from a transaction compensate the losers for it.

For e.g. airports compensate the nearby residents for the noise pollution they have to bear by paying them to install double glazing noise refractors. This ways both the parties are happy with the new allocation, making it Pareto optimal. This is the compensation principle.

Asked on February 13, 2018 in economics.
Add Comment
0 Answer(s)
  • Votes
  • Oldest

Your Answer

By posting your answer, you agree to the privacy policy and terms of service.