A policy is efficient if winners could compensate losers.
The standard justification for cost-benefit analysis, and its standard weakness: compensation need only be possible, not actual. Whether that is a defensible test is the live dispute.
In practice
- A road scheme where the time savings exceed the property losses is efficient by this test, and the households whose homes go are not in fact compensated.
- A trade agreement that raises national income and destroys one region's employment passes the test and fails the region.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- Rules for choosing, and the paradoxes that humbled the theory