Editing Kaldor–Hicks efficiency (section)

==Explanation==
A reallocation is said to be a [[Pareto improvement]] if at least one person is made better off and nobody is made worse off. However, in practice, it is almost impossible to take any social action, such as a change in economic policy, without making at least one person worse off. Even voluntary exchanges may not be Pareto improving if they make third parties worse off.

Using the criterion for Kaldor–Hicks improvement, an outcome is an improvement if those that are made better off could in principle compensate those that are made worse off, so that a Pareto improving outcome ''could'' (though does not have to) be achieved. For example, a voluntary exchange that creates pollution would be a ''Kaldor–Hicks improvement'' if the buyers and sellers are still willing to carry out the transaction even if they have to fully compensate the victims of the pollution. Kaldor–Hicks does not require compensation actually be paid, merely that the possibility for compensation exists, and thus need not leave each at least as well off. Under Kaldor–Hicks efficiency, an improvement can in fact leave some people worse off. Pareto-improvements require making every party involved better off (or at least none worse off).

While every Pareto improvement is a Kaldor–Hicks improvement, most Kaldor–Hicks improvements are not Pareto improvements. In other words, the set of Pareto improvements is a proper subset of Kaldor–Hicks improvements. This reflects the greater flexibility and applicability of the Kaldor–Hicks criterion relative to the Pareto criterion.