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75 Cards in this Set

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Allocative efficiency

(economic, Pareto, social)

Situation in which it is not possible to improve the welfare of 1 person in an economy w/o making s/o else worse off.

Cardinal utility

When the utility of individuals can be measured numerically and thus a score of, say 2, represents twice the value of a score of 1.

Cardinality is an imp requirement for the aggregation of individual utilities.


Notion that it's only the end states that matter--in other words, the ends will justify the means. Utilitariansim, wiht its ephasis on individual utility, is generally seen as consequentialist.


An alternative to utilitarianism in which an objective other than utility is posed as a social goal, often defined in terms of health gain or health-related utility.

Interpersonal comparisons of utility

Comparisons of measures of utility across individuals, that is, involving judgements of whether individual A gains more/less utility than eprson B from the consumption of a good

Maximand (objective function)

A particular variable whose maximization is seen to be a relevant social goal. Exp. utilitarians pose utility as the maximand, while extra-welfarists might pose health gain.

Normative economics

Economic statements that prescribe how things should be

Depend on value judgements about what is good/bad; what ought to be; bound in philosophical, cultural, and religious positions

Welfare economics studies this.

Ordinal utility

Accepts that utility states can only be ranked as opposed to being measured cardinally.

Requires individuals' positions to be compared to their own former positions.

Positive economics

Economoic statements that describe how things are

What is or will be; assert facts about universe we live in

Potential Pareto Improvement (Kaldor-Hicks Principle)

Basis for cost-benefit analysis. It stipulates that a reallocation of resources which makes s/o better off and s/o worse off represents and improvement only as long as those who gain could potentially compensate those who lose.


Key assumption of the utilitarian framework. It sees individuals as being motivated solely by self-interested utility maximization

Utilitarianism (welfarism)

Based on notion that society's interests are best served through the maximization of individual utilities

Welfare economics

Branch of economic theory that addresses normative questions

Aimed at g eting greatest good for greatest number based on utilitarianism "greatest happiness principle" with utility maximized when the tendency it has to augment the happiness of the community is greater than any it has to diminish it. Utility is individual satisfaction. Key to this assumption is individuals know best for well-being. End state what matters rather than process in achieving it; thus utilit is consequentialist.

Is concerned w/ the means by which we can assess the desirability (from a societal point of view) of alternative allocations of resources.

Provides theoretical foundation for questions such as:

1) what are the aims of social policies (ie health financing systems)

2) By which methods are those aims best achieved? (includes policies and tools used by welfare state: benefits in case and kind, social health insurance, redistributional policies improving housing, education, health and social welfare.)

3) How should the economy be run (market, central planning, mixed, or third way (govts in Europe 1990s)

*Not all utilitarians subscribe to market-oriented public policy; pro-market utilitarians and also anti-makret (failure of market to achieve social optimum)

What can welfare economics contribute to cost-effective analysis?

Cost effective analysis provides a framework for decisions to be taken from a societal perspective by comparing the costs of a program w/ its effectiveness. This allows a decision maker, in principle, to allocate resources to those programs that maximize social benefit (here defined in terms of health gain) for given resources. It represents a normative rather than a descriptive tool in aiding decision making in health systems.

Pareto efficiency defn, and assumption that underlies it, and propositions derived from it


Alternative approages to welfare economics

2 approaches to economics: ethical/normative and engineering/positive (political arithmetic)

Extra-welfarism approach:

Benthamite social welfare function

social welfare as the sum of individual utilities

Requires aggregation of utilities. Requires measuring utility on cardinal scale and also interpersonal comparisons of these.

Classical utilitarianism uses this

Opposite to this is modern welfare economics that looks at PAreto Allocative Efficiency in which an inc in welfare can only be assumed if by the change under consideration at least 1 person is made better off w/o any other person b/c worse off.

Allocative (Pareto) Efficiency

Modern welfare economics that found problems w/ measuring and comparing individual utilities (impossible eto compare 2 individual utilities) by developing the Pareto-optimal criterion: an inc in welfare can only be assumed if by the change under consideration at least 1 person is made better off w/o any other person b/c worse off.

Pareto efficiency: demands only that no one is made worse off by a change, is therefore one way to enable judgements about different policies. Idea of mutual benefit and can be seen to underlie the notion of free market.

Is this pareto efficiency practical? Very few policy changes make no one worse off; virtually all case have some losers and do we then reject each time; little would be achieved.

Free market argument is that they entail voluntary exchange. Idea that parties don't enter transactions unless it will make them better off.

Arrow's Impossibility Theorem

Evaluates the issue of social choice w/i utilitarism. Mathematical theorem states that it

is not possible to formulate a collective decision rule to derive social preferences from individual preferences and at the same time be consistent w/ a set of conditions, on the face of it, seem highly innoculus.

These conditions include:

1) completeness in deciding a/b or b/a or indifferent

2) transitivity: if a>B>C than A must be preferred to C to satisfy transitivity

3) non-dictatorship: social preferences are determined by >1 person

4) independence of irrelevant alternatives: preference of a>b is independent of preferences for other alternatives c>d for instance.

Potential Pareto Improvement

(Kaldor-Hicks Compensation Principle)

Forms basis of cost-benefit analysis and implies that a project is socially desirable if the winners are able to compensate the losers and still be better off than before Doesn't ever require compensation to be paid, only requires total gains >losses, regardless upon whom they fall, then a project is efficient.

*Willingness to pay/accept valuations tends to be positively correlated w/ ability to pay/accep and thus income; richer the person, generally, the greater willingness to accept/pay.

*Major prob w/ this is that actual redistribution of gains & losses is ID gainers and losers and further problem is measuring extent of losses/gains.

Justify compensation principle as a social decision rule and why under it compensation need not be paid

OBjective of compensatsion rule: determine whether benefits to society exceed costs--do they promote social effficiency.

To argue for actual compensation, would be to invoke addn distributional concerns that are separate from those of efficiency adn not strictly w/i scope of such analysis. This doesn't mean they can't be taken into acct; however, whether they are or are not is a separate issue.


Based on Sen's concept of capabilities- which defines the relevant maximand as individual capacities (instead of utility) and is alternative to welfarism.

About incorporating objectives, either in addition to or instead of utility

In health, extra-welfarism ~based on proposition that health or health-related utility is the more appropriate maximand of health.

Based on notion that health is instrumental to individual in achieving life goals. Objectives built into cost-effectiveness and cost-utility analyses

What health principles under welfarism might be excluded in extra-welfarism approach

Benefits of patient reassurance, autonomy, choice.

Welfarsism potentially allows the consumption of any good that impacts on utility to enter into consideration. For exp, in HC, includes non-health benefits.

Economics Defn &

Aim of Economic Evaluation

Economics: study of scarcity & choice

Aim of Economic Evaluation: help decision makers make best use of limited resources.

2 approaches for allocating resources: market or through planning decisions.

List 4 types of economic evaluation

1) Cost-benefit analysis

2) Cost-effectiveness analysis

3) Cost-utility analysis

4) Cost minimization


Summarize strengths and weakness of each of the 4 types of economic evaluation approaches


Explain the key stages of planning an economic evaluation

Defn, consider external influences, include all feasible options, examine costs, measure benefits


1) Definition of the project/product:

2) Consideration of external influences: who is requesting the study. Interest groups, including commissioners of research, can skew/shape study, affecting accuracy/usefulness

3) Including all feasible options: all reasonable options, including doing n/t should be included in analysis as alternatives to the comparison. Ipm that each option chosen is feasible to avoid false options . Alternatives must reach same target group and produce same outcomes.

*False options are ones that:

--may more appropriately be considered for subgroups or diff dz categories

--are more appropriate at diff stages of dz or degrees of riskiness of care or treatment (ie kidney dialysis or kidney transplant studies, home or hospital births)

--compare diff skill groups, which may involve redefining the product- for example, although bathing by care assistants as opposed to nurses yield diff health outcomes, such diff may not be ID in specification of program alternatives

4. Examining costs: technical efficiency (overstaffed; can resources be shared; having facilities open)and opportunity costs (value of resources in their next-best use) rather than relying on administration-based costing methods. Ie loss of earnings and child care in patient seeking care.

5. Measuring benefits:

-3 ways of measure: willingness to pay, shadow prices, human capital

-Decide who in society receives benefits, how much are they affected by benefits; are others in community affected secondarily by those seeking care and relieved/deprived of some benefit (vaccines/resistant bacteria)

-Take care not to double-count and to exclude payments which are merely transfers form 1 member of society to another and reflect no net benefit to society.

Shadow pricing

Prices derived from values expressed elsewhere in the economy through

1) in other markets such as private sector or another country

2) market distortion adjustments (adjusted for scarcity not reflected in price or monopoly influences

Useful in LIC where internal prices may not reflect resource use b/c of exchange controls, imperfect capital markets, etc.

Often, in situation where no prices, can impute that individuals value a product at least as much as the costs they incur to obtain it: time costs, travel costs, and so on.

Major critique: influenced by political processes; others say processes are part of democratic process and thus a legitimate reflection of society's values.

Transfer payments

Payments which are made b/t parties w/o any expected returns to current output or production-- ie, social security payments

What are economic evaluations (efficiency evaluation) used for

1) HC policy to prioritize allocation avail resources at local and central level

2) efficient use of HC services (whether we are getting most out of resources devoted to diff activities or need to allocate differently)

3) Clinical practice: formulation of guidelines for clinical practice

Economic evaluation is most useful and appropriate when preceded by 3 other types of evaluation

1) Efficacy: Can it work? And good>harm?

2) Effectiveness: Does it work? good>harm

3) Availability: is it reaching those who need it

Why is economic evaluation imp?

1) resources are scarce--helps determine allocation efficiently

2) managers don't have access to all info necessary to allocate resources & compare outcomes

3) economic evaluation's analytical approach and its role in measuring cost and consequences provide a logical and systematic basis for decision making

What 2 features characterize the importance of economic analysis

Economic analysis measures costs and consequences of activities.

Based on resource scarcity premise and that there are alternative uses for such resources. Aim to max benefit achieved from resources. Findings of economic analysis are only 1 of many inputs decision makers need to consider. In addn to issues of efficacy, effectiveness ,and availability, concern for equity may also come into play.

What are the key methods of each type of economic evaluation approach


1) Cost-Benefit Analysis: measure social & private costs and benefits of project/policy to determine whether rate of return on investment is worth undertaking

-Expressed in money terms

-Time profiles est & appropriately discounted

-Biases in costs that result from inefficiency & differences that arise from differences in size/scale of operation are assessed

2) Cost-Effectiveness Analysis: undertaken when objective is not in question. Conc on achieving s/t as efficiently as possible or making best use of avail budget. Useful when output well defined, such as injections given or lives saved. Unfortunately, often not poss to conduct studies that result in such simple outputs (multiple outputs or quality may differ). In these cases must find way of measuring various dimensions, weighting them, and then aggregating them.

3) Cost-Utility Analysis: combine diff types of outputs to enable comparisons b/t diff HC interventions. Best-known measure of utility is QALY.

4) Cost Minimization Analysis: cheapest way of undertaking a specified task--assumes outputs won't vary b/t options. Requires only costs to be estimated.

Willingness to pay

Problems arise when ask people--if think they may have to pay, they will understate value; if think they won't have to pay, will overstate value.

Tends to be positively related to income of the person questioned and has distrubtional issues introduced.

3 approaches to measure benefits in economic analysis

1) willingness to pay

2) shadow prices

3) human capital

*avoid double counting and transfer payments

Human capital theory

values people in terms of ability to produce a stream of output which is capable of being used to purchase other goods. Exp, program saves 20yrs of life, value attached to production gains from those 20 years ~wage rates

Major critique: unlikely that the amt a person/relations/society in general would be willing to pay for HC would have any direct or consistent relationship w/ potential loss of earnings.

What valuation methods are used for cost-utility analysis

1) Time Trade-off: based on individual's actual behavior (revealed preference), based on wage-risk trade-offs.

2) Standard gamble: based on stated preferences (contingent valuation), examines hypothetical scenarios and willingness to pay.

*Both revealed preference and contingent valuation approach can be used to value a statistical life.

Cost-utility analysis

Requires measuring quality of life on scale from zero (death) to 1 (full health).

2 common methods are time tradeoff and standard gamble approaches

Time Trade-Off Approach

Used in Cost-utility analysis to measure quality of life.

Ascertains an individual's preferences b/t stipulated health states. Preferences are "values that people assign to different health outcomes when uncertainty is not a condition of measurement." Entails valuing health state by comparing amt time person prepared to live in it in relation to certain period in fll health. Respondents asked to choose b/t paired comparisons w/ choices varied until respondent is indifferent b/t 2 options. At this stage, determine the "Health-state weight"= # years of full health / # years in bad health

Standard Gamble Method

ascertain numbers that represent the strength of an individual's preferences for diff health outcomes under conditions of uncertainty:

1. certain outcome of health state i for t years;

2. gamble involving 2 possible outcomes: full health for t eyars at probability t or immediate death at probability 1-x. X is varied until respondent indifferent b/t choices.

Discounting issues in economic evaluation

Discounting is necessary when benefits or costs accrue over time.

Value benefits >highly if >immediate and prefer costs to be postponed. Process of discounting allows comparisons to be made b/t techniques or projects that have different time profiles. Discount rate reflects society's rate of time preference.

Demand function

The relationship b/t quantity demanded and all other influencing variables. Demand curve usually slopes down as it shows the negative relationship b/t price and quantity demanded, holding all other things equal. As price inc, quantity demanded decreases. Price elasticity.

Giffen good

A good w/ a positively slowed demand curve. As price falls, less is demanded.

Income effect

The effect of a change in real income on quantity demanded, when relative prices are held constant.

The income effect of a price change is the adjustment of demand to the change in real income that results from the price change.

Indifference curve

A curve which shows all combinations of commodities that yield the same amt of utility to the consumer.They show all the combination of goods consumed in bundles that yield the same utility to the consumer.

It is impossible for indifference curves to intersect b/c would violate the assumption in price theory that people are consistent 9(consistency axiom states that if a consumer prefers A to B they will continue to prefer A to B as long as those 2 choices remain avail)

Pg. 32-33 Indifference curves for perfectly complementary items are L shaped and if perfect substitutes will be straight lines.

Marginal rate of substitution

Rate at which a person will give up 1 unit of a particular good/service in order to get more of another good/service while deriving the same level of utility (remaining on the same indifference curve). Quantity of A that consumer must sacrifice to inc quantity of B by 1 unit w/o changing total utility.

A diminishing marginal rate of substitution shows that to maintain total utility, increasing quantities of 1 good must be sacrificed to obtain successive equal increases of quantity of the other good.

Substitution Effect

The change in quantity demanded of a good resulting from a change in the comodity's relative price, eliminating the effect of the price change on real income.

The adjustment of demand to the relative price changes.

Demand curve

price on y

demand on x

slants down from top L to bottom R

specifies relation b/t quantity demanded and factors it affects (price, income, relative prices (of complementary and substitute goods) and tastes. If factors change, then curvve will shift.


The means by which order is accomplished in a relationin which potential conflict threatens to undo or upset opportunities to realize mutual gains.

Institutional economcis (new instututional economics)

efficient use of resources and is concerned with maximization and the costs of conducting a transaction.

Task not merely to minimize production costs but to minimize both production costs and transation costs.

will req goverance structures that differ from governance by markets assumed in neoclassical economics

Asset specificity

Characteristics of assets that determine whether they are reployable or not. 4 types: site, physical asset, human asset, dedicated asset.

These may facilitate opportunistic behavior.

4 types of asset specificity

site, physical asset, human asset, dedicated asset


Transaction in which parties engage to their mutual advantage using a classical contract

Bounded rationality

Behavior that is intendedly rational, but only limitedly so. There are limits of knowledge and capacity that compromise efforts to behave rationally.


Situation where 1 party involved in a contract acts in his/her self-interest at the expense of other party


Situation in which it is not possible to know or even predict the likelihood of an event occuring. This notion is distinguished rom that of "risk" where probabilities are known.

Civil law Anglo-Saon tradition

precedents set by cases in courts over hundreds of years, amended by statutes

Characteristics of a legally binding contract

A clear offer and acceptance (so that a meeting of minds can be said to have occurred)

The absence of coercion--not legally binding if each party not entered into it on own free will.

The intention to create legal relations (ie unlike promises made in domestic circumstances)

The giving of "consideration" in return for the promise to perform (ie the act/promise offered by 1 party and accepted by the other as price of that other's promise)

Freedom of contract

Parties can make any bargain they like, and the courts will not enquire into whether it was a good bargain. Linked to free market idea that choice is exercised by consumers in accordance w/ their individual utility functions will be allocatively efficient.

Allocation of risk

Both parties agree to how risk will be borne in future in certain circumstances. If dispute arises, court will look at original terms to decide who should bear risk, not at what might be fair in present situation. A party can invoke corts to enforce terms.

In drawing up contract, allocate risk and enforce rights by covering following areas:

1) specification of performanc (quant and quality)

2) how products/services will be priced

3) how performance will be monitored

Relational Contracts

Differ from classical contracts because:

1) Not discrete (commencement & termination may not be determined in written contract)

2) Not complete (not all elements can be specified and measured)

3) Likely to be adjusted or varied)

4) Dependent on personal relationships, trust, adn cooperation


A person who acts on behalf of another (the principal)

Impacted Information

When information resides w/ the agent it may be impacted; there would be high costs to achieving information parity.

Informational asymmetry

A principle recognizes his/her own information deficit and the superiority of teh agent's informationP


A person on whose behalf an agent ags

Clinical governance

A framework to promote quality improvement in service provision

Control assurance

Concept to promote best practice in clinical governance so as to meet organizational objectives, to protect all stakeholders against risk and assign responsibility.

Distributive justice

Equity as seen in terms of actual distribution of goods


Fairness, defined in terms of equality of opportunity, provision, use or outcome

Horizontal equity

Equal treatment of individuals or groups in the same circumstances

Procedural justice

Equity as seen in terms of the processes used to arrive at a distribution of goods

Vertical equity

Principle that individuals who are unequal should be treated differently according to their level of need


How readily an individual is able to use a service

Capacity to benefit

Extent to which an individual is able to derive some benefit from the use of a service