6.3 Economic Efficiency and Justice

A. Pareto efficiency: an allocation is Pareto-efficient when no one can be made better off without making someone worse off — the economist's efficiency benchmark: no free lunch remains. A Pareto improvement — someone better, no one worse — is the unobjectionable reform; the two welfare theorems' frame (competitive equilibria are Pareto-efficient; with proper redistribution, any efficient allocation can be a market equilibrium — the theory's case for markets + lump-sum transfers). The benchmark's problem: almost every real policy (a dam, a code, a tax) makes someone worse — pure Pareto improvements are rare birds. B. Kaldor-Hicksefficiency: a change is efficient if the winners could compensate the losers and still remain ahead — could, not do: the potential-Pareto criterion — the working standard of cost-benefitanalysis (the expropriation question: land acquired at compensation; the regulation approved because benefits exceed costs) — and every regulator's implicit test. The justice critique (theexam's necessary paragraph): Kaldor-Hicks ignores distribution (the winners win, the loserslose, the "compensation" never paid — Dworkin's and the CLS-flavoured critique: efficiency as the powerful's arithmetic); the replies: the compensation principle actually built into law (fair acquisition compensation — the constitutional property clause's logic), and the separation thesis (efficiency for the analysis; distribution for the tax-transfer system). The law student'ssynthesis:Pareto is the ideal, Kaldor-Hicks the operational compromise, distribution theconstitutional overlay that makes…