This paper examines methods of compensating those who lose when public or private sector activities bring about undesired income distributional effects. It seeks to: (1) identify various alternative ways of providing compensation; (2) determine how the alternatives differ from each other in terms of economic impact; and (3) determine how to choose among the alternatives so as to maximize social welfare. Two categories of compensatory mechanisms are identified: (1) implicit arrangements which impose constraints on public actions to minimize the harm done to certain groups; and (2) explicit arrangements which attempt to offset the harm already done. In terms of equity, it is advocated that compensation arrangements be compared on the basis of tarqet efficiency of compensatory benefits, and the manner in which the costs of compensation are distributed. In terms of efficiency, it is suggested that compensation mechanisms be compared on the basis of the real costs required to provide a given amount of compensation. The paper demonstrates that there are identifiable situations in which one form of compensation is preferable to others. (Author/APM)