Introduction To Pareto Optimality Theory

2.2.1 Health Production framework

Production theory or function in contemporary Economic literature traces the link or relationship between inputs and final output. The process of transforming inputs to outputs (finished goods and services) may take place in various sectors and forms such as manufacturing, transportation, education, banking and healthcare.

The technical (quantitative) relationship that exists between inputs combined in production and the outputs derived from that process is known as the production function or frontier. The function represents the technology and it can be for a particular firm, an industry or the economy as a whole. A production function may be expressed in the form of a schedule, a curve, an algebraic equation

However, works by Banker, Cooper and Charnes in 1978, as well as other researchers extended this single output to multiple output situation which has gained wide appeal and application in not-profit sectors including schools and hospitals

In the economics of healthcare, Wagstaf (1996) notes that the individual produces his health by combining health inputs or a bundle of inputs which include hospital services, food, and other inputs. The hospital production refers to how a hospital directly improves a patients’ health or ameliorates sickness while employing available human and material resources.

2.2.2 Pareto Optimality Theory

The Pareto optimality concept began in the first half of the 20th century when microeconomic theory approached the efficiency concept from a Pareto perspective. The term Pareto efficiency is named after Vilfredo Pareto, an Italian statistician and economist who used this term in his research of income distribution and economic efficiency. The Pareto criterion holds if no person can be made better off without making someone else worse off.

In the early classic welfare theorem, Pareto efficiency obtains when in absolute terms, the following conditions hold:

a. There are markets for all possible goods

b. Such markets are perfectly

This gave birth to the investigation of efficiency within firms besides the recognized “social” efficiency concept of the time. Thus during the 50’s, several scholars tried to formalize both types of efficiency. However, it was Farrel’s seminal paper on the measurement of efficiency in 1957 which gave the required insight. Farrell’s definition of productive efficiency was inspired by Koopmans’ work on “activity analysis and his measure of technical efficiency is similar to Debreu’s “coefficient of resource utilization in 1951. According to United States Department for Health and Human Services (2008), the novelty of Farrell’s approach is that his efficiency measure explicitly allows the inclusion of multiple inputs and outputs, whereas previous work (e.g., index numbers) was often limited to single inputs or outputs (e.g., the average productivity of labor). Maredza (2012) also notes that the work by Farrel was the first empirical treatment of the production function as a