In welfare economics, the compensation principle refers to a decision rule used to select between pairs of alternative feasible social states.
According to the compensation principle, if the prospective gainers could compensate (any) prospective losers and leave no one worse off, the alternate state is to be selected.
Two variants are:[2] In non-hypothetical contexts such that the compensation occurs (say in the marketplace), invoking the compensation principle is unnecessary to effect the change.
But its use is more controversial and complex with some losers (where full compensation is feasible but not made) and in selecting among more than two feasible social states.
In its specifics, it is also more controversial where the range of the decision rule itself is at issue.