Potential Pareto Efficiency


Health Economics

  • The idea that if gainers from a change could compensate losers and still gain then there is an increase in social welfare (even if the compensation is not actually paid). If they cannot, or will not, then efficiency in this Paretian sense exists. Another version is the idea that if potential losers can offer gainers an equivalent gain sufficient for them to forgo the proposed change and still be better off than with the change, then the change will not enhance welfare (even if the equivalent is not actually paid). These contortions are gone through in order to avoid having to face up to the reality that a dollar of gain may not be of the same value to each person or, even if it were, that it should be so treated in the social welfare function.