ABSTRACT
Health economics policy concerns require that we frequently and systematically evaluate alternatives. The economic criterion for maximizing well-being is to maximize the sum of the consumer and the producer surplus. Economists base such decisions on the concept of efficiency. Economic efficiency exists when the economy has squeezed out every opportunity for net benefits possible through voluntary means. The introduction of Medicare and Medicaid in 1965 led health economists to focus more on Cost-Benefit Analysis (CBA). Early forms of CBA appeared over a century ago by the US Army Corps of Engineers to evaluate flood control and other water systems. Cost-effectiveness analysis (CEA) and cost-utility analysis have emerged as the principal alternatives to CBA. Although CBA seeks primarily to improve efficiency, changes in the income distribution often result from a project. Good progress in developing a CEA can often determine whether it is possible to take the next step and extend the CEA into a cost-benefit study.
