The Compensation Principle: The Payment of Compensation
The compensation principle has been much discussed in welfare economics. Its ostensive aim is to help make possible welfare comparisons between alternative social states. Are the comparisons which can be made under the compensation principle sufficient to construct a social ordering of alternatives? If a social ordering can be constructed, will it be subject to Arrow's Possibility Theorem? Can the compensation principle serve as the foundation for a useful welfare analysis? The conclusion of this chapter is that the compensation principle cannot appreciably aid in the construction of a useful Social Welfare Function.
The compensation principle really subsumes under it two different kinds of analysis. The form in which it was first advanced, and in which it is still held, with modifications, by supporters of the principle, is one in which the possibility of "adequate compensation" is determining.1 The form in which it has been interpreted by a number of its critics is one____________________