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A very broad definition of efficiency has been given by Knapp : the allocation of scarce resources that maximises the achievement of aims. This is useful, because it suggests that the desire to achieve efficiency arises from the desire to improve the world. Before examining more precise and technical definitions of efficiency, it is useful to understand an abstract economics idea called Pareto efficiency , which is sometimes also called allocative efficiency, though not consistently. This tries to define a criterion for judging different allocations of resources to different uses which might be widely acceptable.

Whether it is widely acceptable or not is debated, but that debate is beyond our aims here.


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It asserts that we would be able to say that one state of the world is better than another if at least one person is better off under the first state compared with the alternative and no-one is worse off. This is called the Pareto criterion. If we change from one allocation of resources to another, for example changing the health care system in terms of the kind of care that is made available, and as a result some people get better care and no-one gets worse care, this is described as a Pareto improvement.

If it is not possible to make any Pareto improvements, then we have achieved a Pareto optimum. A Pareto optimum is therefore a position where it is not possible to make anyone better off without making someone else worse off. If the aim is to make people in general as well off as possible and there is no concern about whether some people are better off than others, then a Pareto optimum is efficient.

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Given a Pareto optimal allocation of resources, that aim cannot be achieved to a greater extent because even if one person, or even many people, could be made better off, we do not know if this is outweighed by the fact that some people, even if it is only one person, are made worse off. However, there is not one unique Pareto optimum; the existence of a Pareto optimum does not mean that this is the only efficient way in which resources could be allocated. There are many allocations of resources that would be Pareto optimal, some of which would imply great inequalities between different people.

If our aims also took account of this, then we might not view all Pareto optimums as efficient. Pareto efficiency is therefore a contentious idea as a way of thinking about how resources should be allocated at a societal level, but does form the basis of definitions of efficiency in economics more narrowly. We will examine three types:. The concept of technical efficiency is used in analysing the production of health and health care.

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Recall from section 1. Production is technically efficient if the most output possible is produced from a given set of inputs, or the fewest inputs possible are used to produce a given amount of output. For example, the number of patients that can be treated in an out-patient clinic depends on the number of medical and nursing staff that are available and other inputs. If the most that can be provided by one doctor and two nurses is 20 treatments each day, then it is technically inefficient to provide 19 treatments using that number of staff or to provide 20 treatments using more staff.

Another way to view this is that an efficient clinic cannot undertake more treatments without employing at least one more member of staff. It is therefore Pareto efficient: production is technically efficient for a given set of inputs if it is only possible to produce more by using more of at least one input.


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The concept of economic efficiency has several alternative labels. One of these is cost-effectiveness , but that term should be used carefully, as will be explained in the section on economic evaluation. Technical efficiency is only concerned with how many inputs are used in production, while economic efficiency is related to the cost of those inputs. Economic efficiency is achieved if the most output possible is produced for a given cost, or a given amount of output is produced at the lowest possible cost.

Using the example above, some aspects of the treatment provided in a clinic could be undertaken either by doctors or nurses. It might be equally technically efficient for 20 treatments to be provided each day by using one doctor and two nurses or two doctors and one nurse. But if we assume that doctors are more expensive to employ than nurses, then it will be economically efficient to use the extra nurse rather than the extra doctor.

So, although it is necessary to have technical efficiency to be able to achieve economic efficiency, not all technically efficient ways of producing are economically efficient. Another way to view this is that, given the costs of employing staff, an efficient clinic cannot undertake more treatments without them costing more to provide. As before, it is Pareto efficient: production is economically efficient for a given set of input prices if it is only possible to produce more by incurring greater costs.

Social efficiency is a much broader concept. Both technical efficiency and economic efficiency concern production, and if the supply side of the market achieves economic efficiency in every market, there is allocative efficiency in production for the economy as a whole.

An equivalent concept for the demand side of the market is allocative efficiency in consumption where, given prices of goods, consumers maximise their utility. Social efficiency is where both of these are achieved. It means allocative efficiency in the economy as a whole, which is the same as the overall Pareto efficiency described earlier. Social efficiency is not a concept that has practical use in health economics, but it is an important idea for debates about whether markets should be used in health care.

It can be shown that if markets work perfectly, then they will produce a socially efficient economy.

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To some, this gives a presumption in favour of market provision. However, if markets do not work perfectly they will not produce a socially efficient economy. The questions are then how imperfect markets are and whether there are alternatives, such as government provision, that are better. It is also important as a basis for a form of economic appraisal called cost-benefit analysis, which is discussed in section 5.

Equity is always an important criterion for allocation of resources. However, it is observable that people attach more importance to equity in health and health care than they do to many other goods and services. Equity is an important policy objective in almost every health care system in the world. Economists have created some very useful ways of measuring equity, but apart from that economic analysis of equity is less clear than the analysis of efficiency and there is lower consensus amongst economists about it. It is important to distinguish equity from equality.

Equity means fairness; in the health care context this means a fair distribution of health and health care between people and fairness in the burden of financing health care. Equality means an equal distribution, but it may not always be fair to be equal. For example, it might be thought to be unfair both healthy and sick people are given equal amounts of health care. However, equity is often defined with respect to equality and inequality. For example, it may be considered equitable that people who have an equal need for health care should have equal access to it.

This is a very common definition of equity. However, there could be others, for example:.

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There is a useful distinction when using equity definitions like this, which also has roots in philosophy, between horizontal and vertical equity. Horizontal equity means the equal treatment of equals; for example, do people who have the same health needs have equal access to health care? Vertical equity means the unequal treatment of unequals; for example, do people who have worse levels of health have greater access to health care? There are some equity principles that do not take this form. The maximin principle is if there are inequalities in the distribution of resources, these must benefit the least well off.

The free market principle is that any distribution of resources, even if it produces very large inequalities, is fair if it results from fair trading, with a fair starting point for trade. The principle of procedural justice might mean that the process used to decide on the allocation of health care resources between people should be fair. It is likely that these equity principles will conflict with each other. But economics does not really have anything to say about which of these, or others, is the fairest.

That is a normative question, based on individual or collective value judgements and may be best analysed using philosophical, legal and political analysis. Economics may be able to describe inequalities, but normative analyses is needed to make judgements of these are inequitable; for example, whether inequalities in health care use across income groups are inequitable.

More generally, three areas are commonly considered as the possible objects of equitable distribution: health; health care; and the finance of health care.

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Equity in the distribution of health is almost always expressed in terms of inequalities in health between different socioeconomic and demographic groups within populations. Such health inequalities, particularly those that demonstrate that health status levels vary systematically and inversely with socioeconomic status, are always important in health policy debates within most countries and are a major concern of governments, depending on their political preferences.

Many countries include reduction of inequalities in health as a key aim of their health policy.