Class #3: In Class Exercise Pareto Efficient Allocation An allocation of resources in which it is impossible to make Pareto improvement. KaldorHicks Efficient Allocation Allocation of resources for which it is impossible to make a Kaldor-Hicks Improvement. Pareto Improvement Change in the allocation of resources that makes some individual better off without making at least one individual worse off. KaldorHicks Improvement Change in the allocation of resources that makes some people better off by more than the amount that it makes others worse off. In the context of a market, this is an increase in total surplus. Equivalently: A re-allocation is a Kaldor Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off in a way that would lead to a Pareto-improving outcome. Problem 1: Start: Person A has $10. Person B has $10. Assume the marginal utility of money is constant and equal between the two people. Are the following new allocations Pareto Improvements? Are they Kaldor-Hicks Improvements? Are they neutral with respect to either criterion? Start A: $10 B: $10 1a) A: $10 B: $12 1b) A: $9 B: $15 1c) A: $9 B: $11 1d) A: $700.00 B: $9.99 1d) A: $10 B: $10 1d) A: $12 B: $11