Compensation Test

Definition

Health Economics

  • This is a way of measuring the desirability of a proposal for change. If the people who are expected to gain from the change are willing to compensate those who lose (that is, fully compensate them such that they are at the least indifferent between accepting and not accepting the change) then the change is judged to be welfare enhancing. An alternative test is to discover whether the expected losers can compensate (just) the potential gainers for going without the proposed change; if so, then the change is not welfare enhancing. Or one might apply both tests. These are ways of trying to identify Pareto improvements and potential Pareto improvements in social welfare.
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