Kaldor-Hicks criterion is named by Nicholas Kaldor and John Hicks. Kaldor-Hicks criterion is also known as Kaldor-Hicks efficiency. Kaldor-Hicks criterion is a measure of economic efficiency that captures a number of the intuitive attractiveness of Pareto efficiency, however have less stringent criteria and is thus applicable to a lot of cases. According to Kaldor-Hicks criterion, a more efficient outcome will leave some individuals worse off. Using Kaldor-Hicks criterion, an outcome is more efficient if those that are made better off can in theory compensate those that are made worse off. Additionally, the Kaldor-Hicks don’t require compensation, and therefore does not have to make every individual better off.

Although all Kaldor-Hicks criterion situations are Pareto criterion, on the contrary isn’t true. In contrast, through each Pareto improvement could be Kaldor-Hicks improvement, but most of the Kaldor-Hicks improvements don’t seem to be Pareto improvements. This is because, the Pareto improvements are a small part of Kaldor-Hicks improvements; it also reflects the most flexibility and applicability of the Kaldor-Hicks criterion relative to the Pareto criterion.

The Kaldor-Hicks methods are usually used as tests of Pareto criterion instead of as efficiency goals themselves. They’re used to verify whether or not an activity is moving the economy towards the Pareto criterion. Any change typically makes some individuals better off at the same time making others worse off, therefore these tests ask what would happen if the gainer were to compensate the losers.