McPake ch 8.docx

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McPake ch 8 The theoretical bases of economic evaluation81 adding up costs and benefits the need for a conceptual basisEfficiency in exchange in a world of two individuals and two goods individuals will trade the goods in order to maximizr the utility They will do this until the marginal rate at which they are willing to substitute the goods marginal rate of substitution MRS is equal to the ratio oif the prices of the goods Thus for efficient exchange for any two individuals and any two goodsefficiency in production in a world of two factors of production say equipment K and Labor L production is efficient when the cost of the inputs is the lowest possible Keeping output constant we can vary the proportions of equipment and labor The rate at which we can substitute K and L for a given output is the marginal rate of technical substitution MRTS between K and L The lowest cost of production will be when no further substitution leads to reduction in cost that is when the MRTS is equal to the ratio of input pricesefficiency in production and exchange where production takes place in an economy the rate at which it is possible to switch production between any two goods a and b the marginal rate of transformation MRT must equal the ratio of the prices of goods for efficient production and exchange82 Markets microeconomics and Paretian welfare economicsin most societies most goods and services are allocated through market processesusing market mechanisms may remain the best available option even when the conditions for perfect markets are violatedto achieve the aim of obtaining the greatest benefit to society from health interventions certain conditions must prevail An important one is that the processes of production of services must be efficient there are two main ways in which production can be inefficient1 using unneccesarily large amounts of a
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