ABSTRACT
The hospital resource allocation issue is concerned with how the government or private hospital owners allocate the budget and other resources in order to achieve maximum results while encouraging equality. The hospital production function is a mathematical relationship between the output, quantity, and input combinations required to produce. The cost function deals with the relationship between hospital costs and the output level. It is considered superior to the production function in determining allocation because it uses input prices that are independent of the error rate in the regression equation. Decision making solely based on long-run average cost is certainly incomplete. Operational costs look only at hospital costs and do not consider patient and social costs. The decision based on the average cost function alone is still not sufficient in terms of the potential impact if hospitals with high average profits today can potentially experience decreasing marginal benefits if the size is expanded.
