We need to be certain that the alternative chosen from a bouquet of options shoud be the most ideal and efficient solution to the particular problem. The Kaldor-Hicks criterion can be widely applied to policy and decision making situations. It can be the basis for cost-benefit analysis on investment decisions, redistribution policies (like subsidies), taxation policies and many other decisions.
Consider, Mr Polluter who wants to set up Pollution Factory at Nature Village. He has chosen Nature Village, because it confers on him certain advantages, as compared to other locations (Maybe, Nature Village has cheap land, or a rivulet stream which provides adequate water round the year). We are concerned about the costs imposed by Mr Polluter's factory on Nature Village, and how much the residents of the village have to be paid to persuade them to accept setting up the Plant there. Assume, Pollution Factory inflicts net external costs amounting to about Rs X, which is also the minimum amount demanded by the villagers to put in place the mechanisms to remedy the costs inflicted by the factory. Also assume, it would cost Mr Polluter and additional Rs Y to establish the Plant at the next best location. If Rs Y > Rs X, then there is the poossibility of a mutually beneficial bargain between the two parties.
Similar examples galore in urban areas. It is commonplace to have complaints against some objectionable shop or commercial establishment located in predominantly residential areas, causing inconvenience to its neighbours. (The Corporation typically gets 5-10 such complaints every day) There is a simple solution to this problem. Assume Mr Welder wants to set up a welding shop in Soundfree Colony. Assume also that the Plant generates costs on the neighbours amounting to Rs A, and it would cost Mr Welder Rs B to relocate elsewhere. If Rs B > Rs A, then there is a possibility for a mutually beneficial bargain between the parties and Mr Welder continuing his business in Sound free colony. (The cost could for example be the amount required for setting up sound proofing system)