Chapter 2: Cost Minimization and the Definition of ‘Cost’
2. Cost minimization and the deﬁnition of ‘cost’ 2.1 INTRODUCTION We begin our account of health care evaluations with the cost part of CBA. All four evaluation types rely on these costs, which makes an analysis of costs common to all. We will be focusing on CM because an estimation of costs is all that is required to use this evaluation type. We start by deﬁning economic costs and explain how they depend on the time period being considered. The role of discounting is then introduced. From there we present a detailed account of how CM ﬁts in with economic theories explaining cost curves in the short and long runs. The ﬁrst section closes with an analysis of how discounted costs at diﬀerent times are combined into a present value ﬁgure. CM and its relationship with CEA and CBA criteria are explored in the next section. CM applications follow and the chapter ends with the ﬁnal comments section. 2.1.1 Deﬁnition of ‘Cost’ To a non-economist, ‘cost’ is what you pay for a good or service. Backing up the idea of paying for something is the existence of a receipt. This is a tangible record of incurring cost. So accountants and tax authorities implicitly deﬁne cost as an expense for which you have a receipt. However, to an economist, cost refers to the sacriﬁce of beneﬁts by using resources for a particular use rather than for some other (best) use. That is, by using...
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