Peter Zweifel and Harry Telser 1 Introduction and motivation Many of the health-care services are transacted within the public sector, are financed by health insurance, or provided by members of professions where barriers to access are high. In these situations, observed prices are not informative in the same way as in open markets, where willingness to pay by consumers is at least equal to the market price and market prices reflect the value of the resources used in production (without externalities). Cost–benefit analysis (CBA) is an imperfect substitute for market valuations. It holds the promise of indicating to policy makers whether a health program is worth its cost. However, CBA requires a measure of valuation by consumers, which is hard to come by. For this reason, alternatives to CBA have been developed in health economics, notably cost-effectiveness analysis (CEA) and cost-utility analysis (CUA). These alternatives are discussed in Section 2 and found deficient in important aspects. Section 3 is devoted to a particular challenge that health behavior seems to pose to the application of CBA, the often-heard quote being that consumers ‘do not give a trifle for health when healthy but are willing to spend their fortune when sick’. It is shown that this does not necessarily reflect instability of preferences (which would render the application of CBA indeed difficult). Issues surrounding the measurement of true cost are discussed in Section 4, while Section 5 returns to the benefits side. The human capital approach is criticized for not being...
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