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Just as in Coleman's example, we have a project which passes the Kaldor test (since A would prefer having one acre of cotton and one acre of wheat to having two acres of wheat) but which fails the Hicks test (since B would prefer having one acre of each crop to having two acres of cotton).

Clearly, we are comparing second-best states. If A really preferred growing one acre of wheat and one acre of cotton to growing two acres of wheat (after transactions costs), A would already be growing one acre of each crop - he would not wait for a court to give an acre of his land to B, let B turn it into a cotton patch, and then try to convince B to give the land back to him. Similarly, if B really prefers growing one acre of each crop to growing two acres of wheat, she would not sue for the right to grow cotton on one of B's acres of land, she would sue for the right to grow wheat there. Indeed, since A is already using the land to grow wheat, B would not even have to spend money to convert the land into a wheat farm.

Therefore, we are really choosing between four projects, not two. The four possibilities are outlined in Table 3.3A.18

Possibility 3 is identical to a situation in which the rule was passed and B actually compensated A. Similarly, possibility 4 is identical to a situation in which the rule was not passed and A actually compensated B in return for not

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