Worksheet

5 EFFICIENCY AND
EQUITY

1. In October, 2003, the International Development Research Center (IDRC) posted an article on its website that
provides an application of the concept of allocative efficiency. ( “Making Plans for Success — The Tanzania
Essential Health Interventions Project”, http://www.idrc.ca/en/ev-45726-201-1-DO_TOPIC.html, accessed
12/27/2006) The article described how child mortality had been reduced by more than 40 percent over five
years in Tanzania, not by increasing total health expenditures, but by reallocating the existing meager health
budget more strategically. “By ensuring that meager resources were spent on the diseases that caused the
greatest ravages, that the right medicines were available at the right time, and that health personnel were
trained to treat patients effectively, the project has proven that an integrated approach to managing a health
system is key to improving community health.” The rule you learned in Chapter 5, “produce at the point
where the marginal benefit equals the marginal cost,” is applicable in this situation with some modification.
Define marginal cost as “the opportunity cost of medical services devoted to battling a particular disease” and
marginal benefit as “years of life saved from an additional unit of medical service spent on fighting the
disease”.
An article in The Economist provided an application of the concept of allocative efficiency. The article focused
on the allocation of resources available for the annual health budget of Tanzania—about $10 per person per
year. Researchers in Morogoro, Tanzania found that the pre-1998 health budget reflected serious resource
misallocation. “Malaria, for example, accounted for 30 percent of the years of life lost in Morogoro, but only
5 percent of the 1996 health budget. A cluster of childhood problems, including pneumonia, diarrhea,
malnutrition, measles and malaria, constituted 28 percent of the disease burden, but received only 13 percent
of the budget. On the other hand, “Tuberculosis, which accounted for less than 4 percent of years of life lost,
received 22 percent of the budget.” ( “For 80 Cents More.” The Economist August 15, 2002)
a. Use the diagrams below to indicate the current situation in Tanzania for medical care devoted to malaria
and tuberculosis.
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In both figures the dotted line indicates the quantity of units of medical care devoted to each
illness. Currently fewer than the efficient number of units of medical care are devoted to
malaria and, as the figure shows, for this disease the marginal benefit of an additional unit
exceeds the marginal cost. And more than the efficient number of units of medical care are
devoted to tuberculosis and, as the figure shows, for this disease the marginal benefit of an
additional unit is less than the marginal cost.

b. Could Tanzania be made better off with no increase in its health care budget? Refer to your answer to part
(a).
Because the marginal benefit of the last unit of medical care devoted to malaria is greater than
its marginal cost and because the marginal benefit of the last unit of medical care devoted to
tuberculosis is greater than its marginal cost, Tanzanians can enjoy a net gain by transferring
resources away from tuberculosis and into treatment for malaria. This transfer moves both
markets closer to the efficient quantity of resources. In both “markets” the figures show that
there is a deadweight loss from inefficiency. The “market” for medical care devoted to malaria
suffers from underproduction and the “market” for medical care devoted to tuberculosis suffers
from overproduction.