Once consumers are assigned different distributional weights, it is possible for policy changes with efficiency losses to raise social welfare by ’improving’ the distribution of income. Two approaches can be used to account for distributional effects. The first, which is recommended by Dre_ze and Stern (1990), multiplies the dollar change in utility for each consumer by their distributional weight and sums them. Many analysts are reluctant to allow their subjective assessments about the weights to play such an important role in policy evaluation. Bruce and Harris (1982) and Diewert (1983) avoid this problem by using the compensation principle to convert efficiency gains into Pareto improvements. Whenever governments balance their budgets, they must choose how to transfer revenue across consumers, and by choosing patterns of transfers to make the personal shadow value of government revenue positive for every consumer, there are strict Pareto improvements from aggregate dollar gains in utility.
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