Lecture 3

Question 1

What is the Pareto Criterion?

Answer 1

It is an alternative of allocation that makes at least one person better off without making anyone else worse off.

*Heavily value loaded concept - It doesn’t question the initial allocation of goods. So, you somehow accept it as “fair”.

Question 2

What is CBA?

Answer 2

It is a tool to help acheiving an efficient allocation of resources

Question 3

What is efficiency?

Answer 3

Scarce resources are allocated in a way that they generate the highest possible benefit

Question 4

What is Kaldor-Hicks Criterion?

Answer 4

A policy should be adopted if those who will gain could fully compensate those who lose

Question 5

What are the reasons to defend the Kaldor-Hicks Criterion?

Answer 5

1. Always choosing policies that maximize positive net benefits

*Where policies interfere with each other: choose the combination of policies that maximizes net benefits.

2. Different policies have different winners and losers
3. Redistribution

Question 6

What Criterios does CBA usually use?

Answer 6

CBA typically uses the Kaldor-Hicks Criterion because it allows policemakers to assess whether a project or policy change generates net benefits for society as a whole, even if some individuals are negative impacted.

Achieving Pareto efficiency may be impractical due to conflict interests.

Question 7

How the distribution of wealth and income may influence a CBA?

Answer 7

by affecting who bears with the costs and who receives the benefits of a project or a policy

Question 8

What is the point of alternative of a distributionally weighted CBA?

Answer 8

The greater weight is given to the welfare of the disadvantages or vulnerable groups (low-income individuals), when evaluating the costs and benefits of a project.

This ensures that the analysis reflects the distributional impacts of the project and considers equity.

Question 9

Discuss the fundamental problems against of using a CBA as a decision-making tool

Answer 9

1. Incomplete consideration (may miss important costs and benefits like env. impact)
2. Distributional impacts (might not address how projects affect different groups, leading to wider inequalities)
3. Subjectivity (like putting a value in human life)
4. Discounting future (could undervalue long-term effects like env damage)
5. Risk and uncertainty (may not fully capture risks)
6. Complexity (CBA requires technical knowledge and tools)