Given scarcity, what we need is an allocation or decision making system to determine how much of which kinds of health care is provided. There are three possibilities: the free market; the command system; and the mixed system.

The free market would allocate health care resources according to consumers' purchasing behaviour, while the command model would use planning to allocate health care according to some pre- determined criterion such as 'need.' The mixed system would combine parts of the free market with elements of the command model.

How can society decide which of these systems is most suitable in any given case? There are two criteria that economists use to assess the performance of an allocation system. The first is efficiency: does the system produce an allocation which is Pareto efficient (and thus on the economy's PPF). If the allocation is efficient then the economy is producing exactly the quantity and type of health care that society wants (allocative efficiency) and it is producing that health care for the lowest possible cost (productive efficiency).

The second criterion is equity: does the system produce an allocation which meets society's requirement for justice? Clearly, this is a normative issue: the decision made depends upon people's values. However, it is a very important consideration for many people when they consider the allocation of health care. It is possible to argue, for instance, that notions of social justice were the single most important influence on the setting up of the National Health Service in the UK.

Equity is a difficult concept to analyse but it helps if we differentiate between horizontal and vertical equity. Horizontal equity is concerned with the equal treatment of equal need. This means that to be horizontally equitable, the health care allocation system must treat two individuals with the same complaint in an identical way. Vertical equity, on the other hand, is concerned with the extent to which individuals who are unequal should be treated differently. In health care it can be reflected by the aim of unequal treatment for unequal need, i.e. more treatment for those with serious conditions than for those with trivial complaints, or by basing the financing of health care on ability to pay e.g. progressive income tax.

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