Compensation principle

In welfare economics, the compensation principle refers to a decision rule used to select between pairs of alternative feasible social states. One of these states is the hypothetical point of departure ('the original state'). According to the compensation principle, if the prospective gainers could compensate (any) prospective losers and leave no one worse off, the alternate state is to be selected (Chipman, 1987, p. 524). An example of a compensation principle is the Pareto criterion in which a change in states entails that such compensation is not merely feasible but required. Two variants are: In welfare economics, the compensation principle refers to a decision rule used to select between pairs of alternative feasible social states. One of these states is the hypothetical point of departure ('the original state'). According to the compensation principle, if the prospective gainers could compensate (any) prospective losers and leave no one worse off, the alternate state is to be selected (Chipman, 1987, p. 524). An example of a compensation principle is the Pareto criterion in which a change in states entails that such compensation is not merely feasible but required. Two variants are: