Do Technical Objections To Kh Apply To

Four technical objections have been made to the use of KH efficiency calculations. These are (1) circularity, (2) compensation test failure, (3) indeterminacy, and (4) status quo bias. These issues arise partly out of a basic confusion that exists about the relationship between the KH compensation tests, the CV and EV measures of welfare change, and the concepts of WTP and WTA. I propose to show that none of these criticisms applies to KHZ. All of the technical objections to KH arise from measurement problems: if perfect measurement of welfare states were possible the objections would disappear. In defining KHZ, I do not mean to imply that measurement problems do not remain. Clearly in some cases the measurement of WTP or WTA will be imperfect or will imperfectly reflect actual preferences. This empirical problem is a matter for another sort of discussion than this one.

Compensation tests

The first requirement is met because, under KHZ, the measurement of the value of gains is always less than the (absolute value) of the measurement of equivalent losses by definition. So, the potential compensation tests are met by definition. (An extended discussion of compensation and circularity issues is provided in the appendix to this chapter.)

Circularity

Coleman (1980) cites the Scitovsky reversal problem as a major issue of the use of KH. There are fundamental errors in his analysis as is shown in Appendix 3. But there is no circularity issue for KHZ. For in using KHZ and thus the WTP and WTA net benefit test to gauge the value of a move from I to II and from II to I, it is quite impossible to approve a move from I to II and then back again, as is required for the Scitovsky test, when gains are valued less than or equal to equivalent losses. This is because if one gains from a move from I to II, one will lose even more in a move back. And, if one loses from a move from I to II, one will gain less from a move back.17

Status quo bias

As Chapter 5 shows and as is well known, it is possible for the results of a KH or KHZ test to favor the status quo as between A and B, whichever position is the status quo. So, if society is in position A, it will not pay to move to B, and if society is in B it will not pay to move to A. This is not a bias, however, but arises naturally from the divergence of WTP for gains and WTA for losses. That is, the KHZ measure correctly reflects the power of the existing property rights and the fact that a move from the current legal/

psychological position will inflict losses that are felt more than equivalent gains.

Indeterminacy

Similarly, it is shown in Chapter 5, that the indeterminacy problem disappears with use of KHZ. Under KHZ welfare is maximized by selling the right to the highest bidder (see Chapter 5).

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