Today's Question
Welfare economics asks: 'What's best for society as a whole?' Economists often use total surplus (consumer + producer surplus) to measure welfare. But this raises a question: Is a policy that makes 1 person $100 richer and 10 people each $5 poorer a 'good' policy? Total surplus rises by $50, but is it fair?
Model Answer
This is the efficiency vs equity debate. The Kaldor-Hicks criterion says: If winners COULD compensate losers and still be ahead, the policy is 'potentially' efficient. But 'could' doesn't mean 'will' - real compensation rarely happens. Most economists acknowledge that total surplus isn't everything - distribution matters too. A policy might be efficient but unfair, or fair but inefficient. Both matter for good policy-making.