The Scitovsky Double Criterion | Economics Optional Notes for UPSC PDF Download

Introduction

• Prof. Scitovsky has pointed out that the Kaldor-Hicks criterion leads to a contradiction. The Kaldor-Hicks criterion shows that a movement from Q, to Q} is an improvement through redistribution in Figure 2. But if compensation is actually paid, it may lead to a different redistribution of income before and after the change. It is, there- fore, possible to have the reverse movement in terms of the Kaldor- Hicks criterion. In such a case, each situation would be better than the other.

• This is the contradiction in the Kaldor-Hicks criterion, known as the Scitovsky Paradox. This can be understood with the aid of Figure 2 If both individuals A and В are at Q2 then Q1 which is better for A and worse for В is an improvement because from Q1 both can go to D on the same utility possibility curve by means of redistribution which is a better situation than Q2.
• Similarly, it can be argued that Q2 is better than Q1 because from O1 redistribution can lead to F on the utility possibility curve B2A2 which is a better situation for both A and B. Thus the two situations Q1 and Q2 would be better than the other which is a contradiction. This is known as Scitovsky’s reversal test.
• To overcome this contradiction, Scitovsky suggests that a change is said to increase welfare if (a) the Kaldor-Hicks criterion is satisfied, i.e., the gainers are able to compensate the losers, and (b) the losers are incapable of bribing the gainers for not accepting the change. Thus Scitovsky’s double criterion requires the fulfilment of the Kaldor-Hicks test and the non-fulfillment of the reversal test. Therefore, a movement from Q2 to С is an improvement because both A and В can move further to D where they are better off, but not from С to Q1.

Its Criticism:

The Scitovsky double criterion is also not free from criticism:

• It operates on the basis of an implicit and unacceptable value judgement. It thus avoids the basic problem of interpersonal comparison which is required to evaluate a policy change which harms one individual at the expense of the other.
• The Scitovsky criterion does not solve the problem arising from the Kaldor criterion even if the utility possibility curves do not intersect, as in Figure 3. At point Q2, В is better off but A is worse off than at point Q1. Even though the two utility possibility curves do not intersect, we come to the same conclusion reached by both Kaldor and Scitovsky criteria because the B2 A2 utility possibility curve lies above the B1A1 curve.

The Little Criterion

• Little does not consider the Kaldor-Hicks criterion and the Scitovsky criterion as satisfactory criteria of welfare. He is in favour of actual rather than potential changes in welfare and proposes his own criterion in these words: “A change is economically desirable if it results in a good redistribution of welfare, and if a policy of redistributing money by lump sum transfers could not make everyone as well-off as they would be if the change were made.”

Conclusion

Thus, the various compensation criteria which led to the so-called New Welfare Economics were attempts at presenting a universally valid criterion for increase in welfare. These attempts, however, failed because the economists were not successful in offering a value-free welfare criterion.