Carragee Consulting

Thinking about Pareto charts made me remember the Econ 101 lectures I attended on Kaldor-Hicks efficiency vs Pareto’s definition of efficiency.

Pareto’s view of efficiency is extremely narrow — it requires that no exchange be made unless each individual party is made better off, or at least no worse off from the exchange.

The Kaldor-Hicks vision of is much more flexible because it doesn’t focus at the individual level, but at the entire system-wide level. Kaldor-Hicks allows for exchange when the net benefit is increased across parties, even if an individual actor is made worse off.

In sales negotiations you may have heard of “give-get” conversations where the seller and the customer try to find mutually beneficial exchanges. For example, are their costly services baked into an offering that the customer doesn’t value or plan to use that can be striped out?

This came up for me in a lease renewal discussion with a tenant whose van does not fit in the 1920’s garage at her apartment. Is there a way to limited the rent increase, but offering her stall in the garage to the upstairs neighbors?

More often though in negotiations it seems there are winners and losers, that business deals with the zero sum games. In my real estate rental example, property taxes have increased dramatically so its a question of incidence (they are levied on the owner) and burden (what % of the cost increase can be passed on to the tenants)?

A deeper dive on Pareto vs Kaldor Hicks is available here: https://www.grin.com/document/491913