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Indirect cost in economic evaluation: The opportunity cost of unpaid inputs

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  • John Posnett
  • Stephen Jan
Abstract
Unpaid time represents a potentially significant input into the health production function. The paper sets out the basis for valuation of time inputs consistent with the notion of opportunity cost. Such analysis requires consideration of whether time displaced in the production of health involves lost work or lost leisure. Furthermore, because valuation of opportunity cost requires the consistent treatment of costs and benefits, the study also considers the valuation of outputs. The basis for valuing the shadow price of work time is examined by firstly assuming perfect competition. The analysis then considers the presence of monopoly and monopsony in product markets and income and sales taxes. The basis for valuing the shadow price of leisure (‘leisure’ being all uses of time except paid employment) is restricted to an examination of methods previously used to value unpaid housework. The two methods examined are the replacement cost and the opportunity cost method. As the methods are not equivalent, the circumstances where each is appropriate vary depending on whether the output lost in producing health is replaced. Although not set out as the primary focus of the paper, the issues surrounding the valuation of outputs generated by non‐market and quasi‐market activity are examined. In particular, where activities such as informal care result in indirect utility to the carers (and patients) themselves, it is likely the full market wage provides a lower bound estimate of the value of marginal benefit. Finally the paper provides a practical approach to examining opportunity cost of unpaid inputs consistent with the concepts set out in preceding sections.

Suggested Citation

  • John Posnett & Stephen Jan, 1996. "Indirect cost in economic evaluation: The opportunity cost of unpaid inputs," Health Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 13-23, January.
    • Handle: RePEc:wly:hlthec:v:5:y:1996:i:1:p:13-23
    DOI: 10.1002/(SICI)1099-1050(199601)5:13.0.CO;2-J
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    References listed on IDEAS

    as
    1. DeSerpa, A C, 1971. "A Theory of the Economics of Time," Economic Journal, Royal Economic Society, vol. 81(324), pages 828-846, December.
    2. Evans, Alan W, 1973. "On the Theory of the Valuation and Allocation of Time: Reply," Scottish Journal of Political Economy, Scottish Economic Society, vol. 20(1), pages 73-74, February.
    3. Sugden, Robert & Williams, Alan, 1978. "The Principles of Practical Cost-Benefit Analysis," OUP Catalogue, Oxford University Press, number 9780198770411.
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