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 International Journal of Social Economics
An economic classification of “health need”
Ruth F.G. Williams D.P. Doessel
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An economic
An economic classification classification
of “health need” of “health need”
Ruth F.G. Williams
Regional School of Business, Latrobe University, Bendigo, Australia and 291
Australian Institute for Suicide Research and Prevention, Griffith University,
Mount Grawatt, Australia, and
D.P. Doessel
Australian Institute for Suicide Research and Prevention,
Griffith University, Mount Grawatt, Australia
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Abstract
Purpose – Multiple connotations and conceptions of health need are currently in use. The purpose of
this paper is to specify some important distinctions regarding this confusing multiplicity in a taxonomic
fashion relevant to the economic problems that arise in addressing health need. Classification is possible
with the relevant concepts in conventional economic theory. The classification applies wherever
economic considerations bear upon health need.
Design/methodology/approach – Initially, some seminal economic ideas about need are presented
from Marshall, Pauly, Banfield, Jevons, Deaton and Meullbauer, and Georgescu-Roegen. Recent
discussions of basic needs by Sen and Nussbaum concerning “capabilities” and human flourishing are
also considered. Ruger’s subsequent developments of these concepts specifically for health are noted.
The paper then specifies and classifies the current economic connotations of “health need” by applying
positive economic analysis and the framework of economic theory. In particular, the conventional
theories of consumer demand and production supply are useful. Geometric tools of analysis along with
illustrations from the health sector specify various distinctions and classifications.
Findings – The uses of the generic term “need” relate to quite different economic problems. The
findings show how diverse interpretations of need can be specified.
Originality/value – Distinctions over health need are important since, in many Western countries,
need is one of the “pillars” of the Welfare State. Effective policy requires sound conceptions and
measurements of need. Given the relevance of economics for approaching competing resource uses in
the face of health need, measurement of need is improved with taxonomy, and confusion reduced.
Keywords Resource management, Classification, Personal health, Health services, Social economics
Paper type Conceptual paper

1. Introduction
Multiple, confusing conceptions about health need are currently in use. “Need” is a word
heard in other applications too, such as education, and services for vulnerable people
(the aged, the unemployed, homeless, veterans, people with either congenital or acquired
disabilities, low-income households, and so forth). Conceptions of need also arise as a
“pillar” of policies based on selective versus universal welfare, or targeted welfare, or the
construction of means tests to determine people’s “need” for welfare. For a general International Journal of Social
discussion of this welfare literature, see Mitchell et al. (1994), and the literatures Economics
Vol. 38 No. 3, 2011
cited therein. Generally speaking, Welfare State subsidies are based on the principle pp. 291-309
q Emerald Group Publishing Limited
0306-8293
The authors gratefully acknowledge the helpful comments provided by the reviewer. DOI 10.1108/03068291111105219
 IJSE of “equal access for equal need”. This principle adds to the multiplicity of concepts of
38,3 need in existence.
Given the number and variety of health services and programs, which involve
public provision at zero prices or private provision at fully or partly subsidised prices,
economic forces clearly bear upon “need”. Often, need is defined in a context of equity,
equality and so forth (Culyer and Wagstaff, 1993; Wagstaff et al., 1991, and the
292 subsequent literature; Wagstaff, 2002). However, the economic aspects of health need
seldom are conceived of in terms of need per se.
The equity or justice context is not surprising when vulnerable people face problems
relating to human existence, such as who lives, how well, and for how long. Despite the
programs, the government subsidies and social insurance structures, all of which exist
to make society fairer, the “necessities” of life for some are not well satisfied.
Economists generally are not concerned with defining need, despite economic forces
clearly bearing upon need. The focus of economics has tended to be upon understanding
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those forces rather than upon the need itself. For a single term, need, to be used in various
contexts invites confusion: our (ultimate) objective is to shed light on this confusing state
of knowledge about need.
The organisation of the paper is as follows. In the next section, the existing economic
definitions of need are reviewed. In Section 3, a conception of “health need” which uses
the conventional economic theory of consumer demand is defined. Some applications,
variations and complexities are also discussed. By exploring the duality between
demand and production, another definition of need is provided in Section 4. This
interpretation, which specifies the relationship between need and the output of health
care, namely, health status (HS), uses conventional production theory. Illustrations from
the health sector are again supplied. A discussion of the implications of the paper and
a conclusion are provided in Section 5.

2. Some current conceptions of need

At the outset, it must be recognised that contrasting meanings of need exist in various
everyday contexts. One connotation is absolute deprivation, in the sense of someone
being “needy”, but another quite contrasting connotation refers to personal, and often
asserted, requirements. The sense of saying, “I need such and such”, often embodies
opinions about a need, and connotations that reflect an individual’s or society’s culture.
The term can be used with an intention of having influence, power or persuasion over
how resources are allocated.
Conceptions of need that exist in economics will now be outlined. Let us first consider
the elasticity concepts in the lineage of Marshall (1890, p. 92). That concept enables
distinctions between needs and luxuries, by the measurement of the “income elasticity of
demand”. For textbook treatments of the concept of elasticity, see for example,
McTaggart et al. (2007) and Pindyck and Rubinfeld (2001). Folland et al. (2001) tabulate
several income elasticity measurements for the health sector, collated from various
studies and several different countries. See also Olson (1993).
Second, following Hayek’s pioneering work on the impact of uncertainty, knowledge
and information in economics, the perspective of information is highly relevant to
defining need in the case in health. Pauly’s (1979) definition of need[1] highlights the
place of information with respect to need in a paper entitled “What is unnecessary
surgery?” In that paper, he states the following:
 Surgery [. . .] would be judged to be necessary if the fully informed consumer would choose it, An economic
and unnecessary if the fully informed consumer would not choose it. In effect (the) consumer
combines the physician’s information (or the hospital’s bookkeeper’s) about costs and classification
consequences with information on personal preferences and income. Such a consumer of “health need”
chooses surgery if its benefits exceed its costs (Pauly, 1979, pp. 97-8).
Pauly is making a positive statement here. He is not engaging in normative judgements
about surgery. The statement emphasises that the decisions by government policy makers 293
about subsidising medical services based on need make considerable demands on
information. A huge literature is associated with this phenomenon; it is relevant here simply
to point out an “information perspective” on need. This notion is behind Pauly’s emphasis
on “the fully informed consumer”, the “costs and consequences”, and the “personal
preferences and income” which underlie a decision as to whether or not some particular
surgery is “necessary”. Making a diagnosis is not just important medical and personal
information, but fundamental economic information for allocating resources to “the need”.
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A third notion of need in the literature is a view that there is a structure to wants. In the
1840s, Thomas Banfield referred to a “graduated scale of wants” (Black, 1987, p. 182).
Banfield was one of the main sources of inspiration of Jevons’ (1862) Theory of Political
Economy, which argued that “the satisfaction of a lower want [. . .] merely permits the
higher want to manifest itself” (Jevons, cited in Georgescu-Roegen, 1954, p. 193). These
notions which Banfield and Jevons (and others) suggested are not anachronisms. Related
notions can be found more recently in, for example, Deaton and Muellbauer’s (1980, p. 122)
conceptions based on asserting a “natural ordering of preferences in groups”. The key
point is that if there is a broad structure in wants, then “lower” wants can be distinguished
from “higher” wants.
A fourth, and related, point argues that personal preferences over commodities are
subject to a spectrum of intensity, from strong to weak, and that commodities for which
preferences are intense are needs. Weaker preferences are associated with commodities
that satisfy higher order wants. Despite some intuitive appeal to that distinction, it does
not of itself distinguish preference intensity from emotion-charged persuasion. For an
alternative conception, see Georgescu-Roegen’s (1954, 1968) argument that some
commodities are maximally substitutable, and these are luxuries. Other commodities are
minimally substitutable. These are needs, e.g. “Bread cannot save someone from dying of
thirst [. . .] living in a luxurious palace does not constitute a substitute for food, etc. [. . .] ”
(Georgescu-Roegen, 1954, pp. 196-7).
The illustrations from the health sector about a person’s HS in part indicate that a
person’s strength of preference for a health service indicates where a medical service
sits in the hierarchy of wants. Thus, a definition of need is implied by HS, as this is an
objective measure of strength of preference. Donabedian (1973), a medical practitioner,
operating at an intuitive level, also came to recognise HS as a measure of need.

2.1. Need, capabilities and human flourishing

Currently, some scholars from various disciplines, including economics, are bringing to
attention their concern for the missing elements in the aforementioned concepts about
need. Motivated, in large part, by a concern with economic disparity over basic needs
in an age of affluence, and an era that is intellectually well stocked with economic
knowledge about how to generate material well being, they regard puzzling over
“need” to be as contemporary as ever.
 IJSE Nobel Prize-winning economist, Amartya Sen, has presented various arguments that
38,3 the conventional approaches in economics to the “standard of living” question are
inadequate. Part of his emphasis is on the concept of “capability” (Sen, 1985, 1987, 1999).
A person’s capability set refers to the ability to achieve particular living conditions,
which largely determines the living standard of that individual. The objective relevance
of capabilities to heath need (a point that Sen emphasises) is a concern not so much with
294 the subjective experience of life but with determining the objective requirements that
mean life can be well lived. Thus, positive economic science is required to inform the
situation.
In collaboration with Martha Nussbaum, Sen next placed capability theory into an
Aristotelian conception of the good life or eudaimonia (also, human flourishing) (Sen and
Nussbaum, 1993). See Alexander (2008) for an exposition. The normative aspect
discussed by these scholars should also be mentioned, and the arguments that underlie
the imperative of how to act. It is noteworthy that Plato had regarded human flourishing
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as the activity and duty of the polis, and Enlightenment philosophers like David Hume
and Adam Smith had continued to emphasise this in their writings. However, these
concepts were increasingly overlooked in post-Enlightenment Western philosophy and
economics.
Ruger (2010) provides an application of these various arguments to health need. Her
Health and Social Justice is a detailed development of Sen’s and Nussbaum’s
conceptions of capabilities and human flourishing, specifically for health. Ruger
explains the need for a paradigm shift towards “health capabilities”, and argues that
there is a place for a set of “higher-order values” with respect to health. She argues that
health has intrinsic value and that there is a point at which health ought to be protected
from all trade-offs. Moreover, since policies and decisions made by all countries
profoundly affect the distribution of health, a coherent set of ethical, reasoned
principles about health need is urgently required. (She emphasises the informational
bases for forming policy that develops human flourishing and the principles that will
remove the gaps in preventable mortality and morbidity.) These include arguments
about the intrinsic nature of the value of health to wellbeing, the concept of a shortfall
of the HS of one group relative to a reference group and the basis for applying
disproportionate amounts of effort to reduce health deprivation in disadvantaged
groups.
In summary, there is not just one, but various, economic ideas about need in the
economic literature, and several different views and perspectives can be adopted
towards health need. However, it does not follow that need is a “matter of opinion”. The
approach of positive economics is relevant to the scientific task of economically
specifying and classifying need. The remainder of this paper embarks on that exercise,
in which a didactic style is adopted. The purpose is to demonstrate that, by applying
conventional economic theory, an economic specification and classification of different
types of needs is possible. It is appropriate therefore to regard the remainder of this
article as an exercise in economic taxonomy of health need.

3. Health need and consumption activity

The first important specification of health need is an economic classification that
places it in relation to consumption activity. The classification here applies the
conventional theory of consumer demand.
 3.1. The point of unconstrained consumption An economic
The action of consumption is due to the human propensity to use (i.e. consume) goods classification
and services. A “health need” arises when a condition or illness develops, i.e. there is
either “a diagnosis” or an existing illness/condition that is diagnosable: lowered HS of “health need”
creates a “need”.
Consider the demand for a product, say, antibiotic medication, which can be
depicted in price-quantity space. For simplicity, let the focus be on medical services 295
where a cure is possible, and consider only binary choices. People with a very specific
diagnosis, such as pneumonia (as a sub-group of all people who demand antibiotic
medication), may consume a course of antibiotic medication. When the pneumonia is
cured, these consumers have no further need of antibiotic medication.
There is a specification implied here. This applies when the following dimension of
need which Lewis (1992) observes is considered: “The quantity of medical services
demanded at a zero price can be considered the consumer’s definition of need”
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(Lewis, 1992, p. 34). Consider the demand curve in Figure 1.What happens at the point
OQ1? In such a case, the marginal utility of antibiotic medication goes to zero. Note that
there are, in fact, many cases of medical services where marginal utility reaches zero,
e.g. tonsillectomy, appendectomy, and so forth (in all such cases a binary choice is
involved[2] ).
Thus, it can be seen that the specification of a specific “need” at OQ1, is one
magnitude, and the points on the demand curve, as depicted by the price-quantity
combinations in Figure 1, are “different” magnitudes from OQ1. Drawing attention to
this distinction particularly matters where “the need” is one of the “necessaries” of life or
basic human existence (and is increasingly receiving attention in terms of the concepts
with which Sen, Nussbaum, Ruger and others are clarifying): this taxonomic distinction
has particular importance in those contexts[3].
Price of antibiotic medication

P2

D
O
Q2 Q1
Quantity of antibiotic medication Figure 1.
Consumption need
Note: Need compared with demand for antibiotic medication
 IJSE 3.2 The consumption dimension of need: the magnitude
38,3 It is possible now to specify a magnitude with respect to “consumption need”. Note that
the terminology being used such as “consumption need” (and later “production need”)
has a pragmatic intention for the didactic purpose here. The purpose relates to
classifying various connotations and conceptions of need that are in use.
In regards to the present illustration, the magnitude under discussion OQ1 refers to
296 the quantity of antibiotic medication that would be wanted in the absence of constraint
by economic variables, such as price or income[4]. The marginal utility is zero since the
treatment cures the condition; there is no further need for treatment. The income
elasticity of demand also equals zero at zero price.
Note that neither price nor income constrains the medical indication of antibiotic
medication at the point of need. Were the price of antibiotic medication to be zero,
consumers would not trade-off the medication in terms of any other commodity. That
is, OQ1 is the point of unconstrained consumption.
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Thus, when the need under study originates from a “shortfall” in a demand factor
(as opposed to supply factors), then “need” in the economic framework of consumer
theory can be specified as the gap between the point of consumption (with a given, or
suspected, medical condition) that is not constrained by any economic variable and
another point of consumption, such as the status quo, which is constrained by economic
variables. In Figure 1, this is Q1Q2.
Such “need” can also be depicted in Becker-type commodity space (Becker, 1965;
Grossman, 1972a, b). One argument represents antibiotic medication, and the other
argument is a composite, all other commodities[5]. In commodity space, the
indifference curve will cut the axis at the point where the marginal rate of substitution
will be zero for a “needed” medical service.

3.3 Consumption need and poverty

Consider now the income constraint where a group of consumers lives in abject
poverty, which is another connotation of need. In Hicksian goods space (Hicks, 1946),
low-income individuals have a Hicksian compensated demand[6] for antibiotic
medication but have very low incomes. The location of demand differs between a lower
income group (shown in Figure 2 by DA) and a higher income group (shown by DB in
Figure 2), because the income position of each group is not the same. Preferences differ
between such groups in regard to consuming antibiotic medication which amounts to a
difference in the price elasticities of demand (Figure 2).
When another person (or society generally) responds to someone in poverty who
needs an antibiotic (or insulin, or a hip replacement, or tonsillectomy, or the services of
a psychiatrist for a severe psychotic condition, or any such medical intervention), a
“caring externality” exists (Culyer, 1980; Pauly, 1981). In that case, that person’s
consumption need is (in effect) bought if an income transfer occurs from those with
higher incomes to those who are poor.
Note that both demand curves for a high and a low-income group in Figure 2 are
co-terminus at the point of need: this quantity of antibiotic medication is determined
objectively. Also, if the income of the low-income group falls to zero, then that group
will consume a zero quantity of antibiotic medication and the price effectively paid
for (zero) antibiotic medication is infinite. This means a period of time of untreated
ill health.
 An economic
P2
DA classification
DB
of “health need”
Price of antibiotic medication

297
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DA DB
O
Q2 Figure 2.
Quantity of antibiotic medication Consumption “need” and
poverty
Note: Antibiotic medication when incomes differ

3.4 Complex consumption needs

The simplified case depicted above involves technology that is both discovered and
available, i.e. a cure being attained by antibiotic medication. In contrast are the cases
where the management of an illness involves ongoing, complex treatment, such as
when cure (technology) does not exist, e.g. treatment for cancer, diabetes and various
mental illnesses. Cases like these are more difficult to depict, and there is less precision
in measuring the magnitude of need. However, the above conception still is applicable
in complex cases: the level of imprecision, in measuring it, is merely heightened by
more complex cases[7],[8].
In the mental health sector, there is another type of complex consumption need. It is
due in part to the mismatching of need and consumption. “Unmet need” is a term in the
mental health literature. It is applied where those with a diagnosable mental illness do
not use services and “met non-need” occurs where people without a mental illness use
(subsidised) mental health services (Andrews and Henderson, 2000). Met non-need
includes not just the Worried Well but those who use services for sport and executive
performance. For some economic studies of “structural imbalance” in the mental health
sector, see Doessel et al. (2008, 2010) and Williams and Doessel (2010). Complex
problems can also arise in measuring satisfaction of health need. These are now well
documented (Asadi-Lari et al., 2003a, b, c; Wen and Gustafson, 2004).
It must be recognised in health sectors internationally that it is commonplace for
government to have a major role in the financing, and often provision, of services.
Matters about public/private service provision in the health sector are tangential to
need, except where positive externalities characterise a health need. An example is the
need for immunisation against infectious diseases where this need entails a positive
external benefit. This type of need has two parts: the private benefit for the individual
of the immunisation, and an external benefit that is social or societal.
 IJSE The public sector has recently received renewed attention from an entirely different
38,3 angle. Some scholars of public administration are excoriating the impact that the
doctrine of the New Public Management is having upon need and suggest a different
approach. For example, there are Denhardt and Denhardt’s (2007) arguments about “the
New Public Service”. There is some empirical basis for this concern: a study which has
measured the need for nursing care in public psychiatric hospitals in the State of
298 Queensland, Australia, through time has determined what happened during
deinstitutionalisation when those hospitals were also operating under New Public
Management doctrine (Doessel et al., 2009a).

3.5 Other variations in the demand curve

Not all instances of health need are specified by the point of intersection shown by Figure 1.
The negatively sloped linear demand exemplified in that figure is the simplified case; it is
important to be aware of some of the sources of variation in demand in the health sector.
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The unbreakable habit is one such variation. Heroin addiction gives rise to a need
for heroin, but the perfectly inelastic demand associated with heroin addiction does not
equate with the health need. The health need is the breaking of the habit or addiction,
with an approach that generates a need for a substitute, e.g. methadone, as well as
addressing other life habits (for a review of the historical and clinical issues in this need
and the treatment of heroin addiction by methadone (Joseph et al., 2000).
Sometimes specific circumstances surrounding a need can lead to economically
unusual consumption patterns. In satisfying some needs, the conventional negative
relationship between price and quantity demanded of the “normal good” collapses if, as
the price of a good rises, and no cheaper substitutes are available, the quantity consumed
does not fall in the process of satisfying that need. The so-called Giffen good or “the
Giffen paradox” was noted a long while ago in economics by Sir Robert Giffen
(1837-1910). The evidence for Giffen goods is relatively limited and it is notoriously
difficult to demonstrate the Giffen paradox anywhere other than a laboratory setting.
In a relatively recent laboratory demonstration, results are reported about smoker
behaviour towards choice of cigarette brand amongst nicotine-dependent smokers
(DeGrandpre et al., 1993). They found a direct relationship, rather than inverse, between
price and quantity consumed of a substitute brand when the smoker’s liked brand was
not available. However, results in economics from laboratory experiments like these
have limited application as they are too far removed from reality for confidence to be
placed in the observed behaviour. For a detailed study of Giffen behaviour, see Jensen
and Miller (2008) who have undertaken a conventional demand study in China and find
Giffen behaviour for two products rice and wheat/noodles. These results imply Giffen
behaviour may arise in subsistence consumption and suggest some cases of health need
may lead to Giffen behaviour in subsistence circumstances: further studies of health
need and consumption activity in the genre of Jensen and Miller are warranted.
Attention will turn now from these various specifications and examples of need
which are consumption-related to some specifications that are production- or
supply-related, i.e. “production need”.

4. Health “need” and production activity

This section applies basic production theory in economics in order to shed further light
on classifying need conceptually when a production perspective applies. Many textbook
 expositions of the production function are available, e.g. Pindyck and Rubinfeld (2001). An economic
A comprehensive survey of the literature on health production functions is found in classification
Connelly and Doessel (2000). The approach here shows conceptually the relationship
between need and the health production function, and need once again being of “health need”
characterised by the absence of constraining economic factors.

4.1 The health production function and “need” 299

Consider Figure 3, which shows a conventional health production function AA. It can
be regarded as the production function for a region or place (in the example, here it is
helpful to characterise this place as a small rural community, though that characteristic
is not central to the argument). The number of medical services is depicted on the
X-axis and HS is measured on the Y-axis. The health production function AA depicts
the highest quantity of HS output that can be produced at each level of medical services
input, all other factors determining HS held constant.
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Conceptually, AA is the optimal production relationship possible for the technical

relationships in health production (note that market considerations and constraints are
not relevant to AA). However, the optimal production function AA is unlikely to exist
in a community. Rather, it is likely that X-inefficiency prevails (Leibenstein, 1966,
1987), and it is thus more realistic to consider the second production function in
Figure 3 which is the line AB, incorporating X-inefficiency[9]. OHS1 is the HS in this
community with OT1 medical services, assuming no X-inefficiency. In the presence of
X-inefficiency, OT1 medical services produce health status OHS2 in this region. OT1 is
an arbitrarily chosen (general) level of service provision. It gives rise to the points F
and D, two of the infinite number of points on AA and AB.
Let us now suppose the following: the number of medical services performed in the
community falls from OT1 to OT2 due to a decline in an input, such as the number of
medical practitioners located in this community. The result is that, ceteris paribus, there
is a movement along the AB production function from D to C and a decrease in HS from
OHS2 to OHS3. The question now is how to regard need, conceptually and taxonomically.

HSmax G
∆HS1
HS1 F
∆HS2 E
HSXmax
Health status

∆HS3 A
HS2 D
∆HS4
HS3
C
B

A
A*

Figure 3.
O
T2 T1 Smax SXmax Production “needs”
in the health sector
Number of medical services
 IJSE 4.2 Specifying production “need”
38,3 Can a meaning of “need” be specified in the context of production? Clearly, it can be. The
difference in health status HS2HS3 may be thought of as a “need” because, when provided
for, this would result in the HS of this community returning to HS2, i.e. depicted by DHS4
in Figure 3. In this context, the meaning of need is unambiguous. When a gap is due to a
supply “shortfall” (i.e. of an input), the relevant approach is to use the conventional
300 production function, which is another economic relationship that is unconstrained by
any economic variable. The appropriate definition, then, of a production “need” is the
gap between the specified output level, i.e. HS, which is explained empirically by
variations in input levels of a relevant production function, and the current level of
output as determined by existing input levels.

4.3 Specifying production “need” and X-inefficiency

The magnitude HS2HS1 is the effect of X-inefficiency (Leibenstein, 1966, 1987).
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Technically, it is possible to estimate that magnitude. This empirical task has not been
undertaken for the health production function, but it has been undertaken for other
sectors (Frantz, 1987).

4.4 Production needs existing in combination

Consider OT1 as the status quo position. Conceivably, the presence of combined “needs”
can also be quantified. If the combined effect of a fall in the number of medical services
(i.e. an input) and X-inefficiency were estimated, then the latter measure of need would be
HS2HS1, i.e. DHS2 þ DHS3. Clearly, it is important to conceive of which need is being
considered very carefully. Further combinations will be discussed shortly. However,
let us further clarify the meaning of this production connotation of “need”.

4.5 Production need and the marginal productivity of treatment

It is possible to depict need in terms of a concept to which (Alan) Williams (1978) and
also Culyer and Wagstaff (1993) refer. This is described by Williams, as follows:
“‘Need’ exists so long as the marginal productivity of some treatment input is positive”
(Williams, 1978, p. 32). This is the case where OT1 medical services are specified in
Section 4.1. It is need in an absolute sense, and is defined by making comparison with
the maximum point on the health production function where the marginal product of
the medical services input (MPmed) is zero.
Consider AA again. Let OSmax represent the number of medical services in this
community that maximises HS, i.e. OHSmax. At point G on AA, MPmed is zero, which is
the point at which Williams (1978) defines need as ceasing to exist: it is, for example, the
point at which “all the tonsils” of a tonsillectomy patient are removed (rather than partial
removal, and a few infected tonsils are “left behind”). Note that if some X-inefficiency
exists (with the relevant production function being AB), then a greater quantity of
medical services OSXmax (superscript X denoting X-inefficiency) is required to attain the
health status OHSXmax . OSXmax is greater than OSmax.

4.6 Production need due to input shortfalls

Now let the quantity of medical services fall to OT1 from OSXmax . At T1 on the X-axis of
Figure 3, the general HS for this community in respect of AB is OHS2. What is “need” in
 this context? Under the assumption that AB is the relevant production function, and An economic
provided that the Williams (1978) concept is accepted, then need is DHS3 in this context. classification
4.7 The cases of production need summarised of “health need”
As various “needs” have been shown in Figure 3, it is useful to re-state each of the
meanings and magnitudes of production need. There is, of course, no “need” associated
with the optimal magnitude of OHSmax. But there is a “need” associated with the AB 301
production function because of X-inefficiency. The magnitude (DHS1 þ DHS2), the
“production need associated with X-inefficiency”, can be regarded as the “X-inefficiency
loss in HS”. The need associated with an input shortfall of SXmax T1 (say, a “need” for more
medical services, more medicines, or more hospital beds, and so on), with a production
function exhibiting X-inefficiency is the magnitude DHS3. This can be described as the
production loss in HS associated with a combination of X-inefficiency and an input
shortfall: it is measured by (DHS1 þ DHS2 þ DHS3). Finally, the sum denoted
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(DHS 2 þ DHS 3 þ DHS 4 ) is conceptually no different from the case

(DHS1 þ DHS2 þ DHS3): all that differs is the quantity of the input shortfall.
These cases of production need are summarised in Table I.

4.8 Other cases of production needs

Three applications of production needs are now provided.
Production need for a cure. There is a dimension of need that is implied in such
statements as, “A cure for, say, cancer, or some such disease/condition is needed.”
Another example is an efficacious program for suicide prevention. Conceptually, such
statements imply, with the present technology and assuming no X-inefficiency, the level
of HS achieved is not sufficient to cure, or recover from, the illness. That is, the maximum
point on AA is below a level of HS that connotes “cure” or recovery for (or prevention of)
a particular condition. If the impact of a new technology is sufficient to gain a cure or
recovery, then the production function shifts upwards0 to AA0 (Figure 4). The new
treatment gives a new maximum HS (of magnitude OHSmax ), at which point the need for
cure (or prevention) has been provided, e.g. an efficacious therapy/approach now exists.
It is another conception of “need” in the economic framework of production.
Production need and severity of illness. The next illustration applies the concept of the
health production function to two distinctly different cases. These cases have arisen
where the levels of severity of mental illness in two groups are quite different[10].

Measure Concept explained in production terminology and in need terminology

DHS1 þ DHS2 The X-inefficiency loss in HS, which often is then associated with a
need being experienced
DHS2 The production loss in HS associated with a combination of an input
shortfall of Sxmax T1 on an X-inefficient production function, which then
is often associated with the experience of a need
DHS1 þ DHS2 þ DHS3 Another production loss in HS associated with a combination of an
input shortfall on an X-inefficient production function, which then is
often associated with the experience of a need Table I.
DHS2 þ DHS3 þ DHS4 A production loss in HS similar to (DHS1 þ DHS2 þ DHS3), and Some concepts of human
differing only in the quantity of the input shortfall. That impact is the need classified in a
experience of a need production framework
 IJSE
38,3

302
Health status
HS′max

A′

HSmax
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A A

O
M′max Mmax
Figure 4. Number of medical services
Production
Note: “Need” for technological change and cure

Consider the cases of two groups, Group S, which is diagnosed with schizophrenia and
Group N, which has a neurotic disorder due, say, to a mid-life crisis. The two mental
health production functions depicted are SS for the group with schizophrenia, and NN for
the group having a mid-life crisis in Figure 5. Given the location of NN and SS, it is clear
that schizophrenia has a larger impact on mental HS than does a neurotic disorder.
The number of psychiatric services is indicated on the X-axis and mental HS

MHSmax N
S
Mental health status

∆MHSN
N
∆MHSS

Figure 5. O
Connotations of “need” for PS
mental health services and Number of psychiatric services
severity of illness notions
Note: The mental health production function
 (as measured by, say, the Global Assessment of Functioning diagnostic instrument An economic
scale) is depicted on the Y-axis, all other factors held constant. MHSmax depicts each classification
group’s mental HS prior to the onset of illness. According to Figure 5, both groups have
the same potential mental HS, as indicated by MHSmax. However, the mental HS of each of “health need”
group is “under-par” at this time, assuming that each group consumes zero psychiatric
services. Thus, we now address the issue that is commonly called “severity of
illness”[11]. 303
How is “need” in the case of severity of illness to be defined? One approach to the
conception of “need” in the context of severity of illness is to observe the magnitude
MHSmaxS in Figure 5. This is the change in mental HS needed by Group S to attain its
former level of health (assuming, for now, that this is possible). However, the change in
mental HS that Group N needs, in order to reach MHSmax, is MHSmaxN. Let us proceed
by considering the effect of OPS psychiatric services on the two illnesses. It is also
relevant to note that, other things being equal, the change in mental HS achieved for
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Group S at the given production function for a given level of psychiatric services OPS
is far greater than it is for Group N, with the same level of psychiatric services. The
relevant magnitudes are DMHSN and DMHSS[12]. It can be said that both groups have
a “need” in so far as each group has an illness; but in terms of interpersonal
comparisons, Group S’s need is greater than Group N’s, ceteris paribus. It could be said
that conceiving of need through the lens of severity of illness transforms need from an
absolute sense into a relative sense that is more finely classifiable.
Regional variation in production need. It is also possible to form an economic
definition of need to have a spatial dimension, e.g. need for health care for an area or
locality, such as a metropolitan suburb, a rural or remote area, or a state/territory. This
case is concerned with comparing levels of production need between two regions,
where the need for health services vary on a regional basis, a phenomenon that often
seems difficult to define and measure.
It is possible to classify a pattern of need using health production functions that
incorporates regional variations in inputs. The following discussion gives an approach
to the type of empirical work required to inform debate concerned with policies about
spatial variations in need. That debate is often referred to as achieving “equal spatial
access to health services” (note that the following discussion about spatial variation in
production need can be readily re-cast in terms of socio-economic variation too).
Figure 6 shows a health production function where the input on the X-axis is the
quantity of general practitioner (GP) services, and HS is on the Y-axis[13]. Health
production functions AA and BB for two regions, A and B, respectively, are indicated.
Note that the maximum HS attainable from AA is higher than that for BB. Region
A cannot attain HSmax at the current input of GP services OGPA. Also, Region B is not
attaining HSmax at the current level of GP services in Region B, OGPB. Figure 6 shows the
changes in HS required in order to attain HSmax. In this illustration, DHSB exceeds DHSA.
All of the above specifications serve to indicate some main classifications. More
work needs to be done in order to refine other variations and complexities relating to
production need which have not been addressed in the above.

5. Discussion and conclusion

It is important that this exposition is seen as a taxonomic exercise in descriptive or
positive economics; need is not being examined here at a normative level. This means
 IJSE
38,3
HSmax
∆HSA
HSA

∆HSB

Health status
304
A
A
HSB B
B

Figure 6.
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The case of “need” for GP

services in two regions, O
defined in the context of GPB GPA
health production function
Number of GP services

that the task is not about considering how to approach the question of whether, or not,
any defined need ought to be met. Despite the very important seminal developments in
the area of capabilities and human flourishing, which are overviewed above, those
developments are still in progress. The conceptions discussed in this paper serve to
clarify some of the tools relevant to objective economic analysis and measurement
of need.
The magnitudes discussed herein exist in the absence of opportunity costs and other
constraining economic forces. This deliberate abstraction does not reflect any intention
of suggesting that opportunity costs and other constraining economic factors are of no
relevance when need is under study. Rather, the purpose is to bring the analysis of need,
and ultimately the magnitudes required for policy debate, under the light of the scrutiny
provided by positive economics. Such scrutiny is warranted: the current policy climate
is one where some “needs” are “met” more than others. This happens for no other
reason than assertion often is a louder voice than reason in policy contexts. However,
few phenomena escape opportunity costs, including ongoing unmet (genuine) need.
An example of this is found in the rising trend in suicide (Doessel et al., 2009b; Williams
and Doessel, 2007).
It may be thought that it is conceptually confused to depict consumption need in
price-quantity space given that prices always imply opportunity costs; and yet we are
abstracting from them here. We demonstrate, though, that to conceptualise need in the
dimensions of a space where prices are depicted is not a conceptual contradiction. Doing
so here has served to demonstrate that need does not have to be an ambiguous notion
particularly in price-quantity space. For example, it is not helpful simply to dismiss need
or to consider its conception only in terms of the income elasticity of demand conception.
Need clearly has several complex dimensions.
It is noteworthy that both Rice (1992) and Olson (1993) have considered similar
arguments to those elaborated in this paper. Both of those authors in the early 1990s
were grappling with the inadequacies in the approaches at that time to the measurement
 of the welfare loss of “excess” health insurance. Those authors arrived at notions similar An economic
to those above. It can take a long time for established views about concepts and their classification
relevance to be re-assessed.
Various cases of need have been characterised here. It should be noted that it is of “health need”
more straightforward to specify need in price-quantity space when a cure is involved
(which has been illustrated here) than it is when ongoing or complex treatment is
required. The information demands upon the latter are great. 305
The ultimate purpose of taxonomy is to clarify and classify types. Here, those types
are the approaches that will result in empirical work for informing policy debate. The
next task is then to examine various types of illness and conditions in order to show how
human need is influenced by each particular illness. Also, further work in the area of
capabilities, human flourishing and health need is required. Finally, the central message
given here is that empirical analyses of various conceptions of need can inform policy in
a lucid way. Conceptual clarity is the prerequisite by which the appropriate measures of
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need can inform policy.

Notes
1. A literature burgeoned from the 1970s onwards amongst health sector scholars over
“appropriate” and “inappropriate” care. The studies are largely found in a literature
concerned with small area variation (SAV). In a sense, Pauly’s paper is a response to SAV,
seeking to bring some clarity to that confusing literature (for an economic review of SAV,
see Doessel and Gargett (2001)).
2. Technically speaking, it is a single point on the vector of demand.
3. Note two contrasting connotations of medical need from a simple example of the case where a
person with diabetes needs two insulin injections daily. This need is sometimes defined, or
measured, in terms of an objective level or quantity: two injections being needed (i.e. not one or
three, or zero, injections). However, another definition/measure of need is in terms of a gap.
If this person with diabetes has no injections, then his/her need is for two injections but if the
person is having only one injection daily, in such a case, there is need is for one (more) injection
daily. Note that in Figure 1, “need” is defined in terms of a gap measured from a starting level
of current consumption greater than zero. There is thus a definition of “need” that is dependent
upon whether the current starting point is zero or a current level of non-zero consumption.
This is not a pedantic point. “Unmet need” is a term, indeed a measure, which is used loosely
in the health sector by some who muddle those two economically distinct meanings
and magnitudes. The economic distinctions in meaning just illustrated are not trivial
when political arguments exist over whose unmet needs are subsidised (Andrews and
Henderson, 2000).
4. Let us also abstract from time. Trade-offs often arise in the timing of undertaking medical
intervention, e.g. resourcing prompt intervention, against the discomfort of living with
reduced, or deteriorating, HS prior to treatment. Such trade-offs are particularly relevant
with chronic illnesses. People facing hip replacement surgery (for example) often live with
deteriorating HS long before the medical intervention (surgery) is performed. This type of
trade-off can occur also with acute conditions. But for the present conception about need, it is
possible to abstract from time and such complications will not be addressed here. For further
discussion of this important point, see Phelps (1997, pp. 110-13).
5. This case will not be depicted geometrically here.
6. Note that, technically speaking, demand here is Hicksian compensated demand (Hicks, 1946),
in which the responsiveness of quantity demanded involves no income effect.
 IJSE For normal goods, the compensated demand curve is steeper in slope than the Marshallian
demand curve, i.e. it will have a different intercept on the X-axis.
38,3
7. The health need/s of a person can be conceptualised in terms of other examples too, say,
nutrition. However, nutrition is a more subjective need, relatively speaking. While the above
explanations apply equally as well to subjective needs as they do to relatively objective
needs, such as surgery (Pauly, 1979), the arguments are more complex. It is not necessary to
306 pursue other more complex cases here.
8. Note that we are abstracting here also from various other factors. One such subjective factor
is endogenous preferences (Bowles, 1998). Another possible factor, from which this analysis
abstracts for the present, is denial by persons of their own need. There can be denial on
another kind too, by society of a person’s need, such as when stigmas about some illnesses
are present. All such factors, being assumed away, are left for a separate analysis where
such assumptions can be relaxed.
9. Note that both AA and AB have an identical intercept of point A on the Y-axis in Figure 3.
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If X-inefficiency existed in some other determinant of health, e.g. if hospital services were
inefficient, then there would be a different (lower) intercept, such as A *.
10. A discussion of the mental health production function is found in Williams and Doessel (2001).
11. For a study from the 1980s about whether or not psychiatric services in Sydney were being
provided in the places where the need is greatest, see Opit and Gadiel (1982).
12. It is relevant to note that the empirical estimation of a mental health production function is
even more difficult than health production functions for general medical services. There are
few studies, of which the authors are aware, that have undertaken that work, e.g. Healey et al.
(2000) and Lu (1999). Williams and Doessel (2001, pp. 67-9) provide an overview.
13. The reader may also conceive of this application in terms of the services of psychiatrists on
the X-axis, rather than GPs, with mental HS depicted on the Y-axis.

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Further reading
Sen, A. (1992), Inequality Re-examined, Clarendon Press, Oxford.
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About the authors

Ruth F.G. Williams is a Senior Lecturer in the Regional School of Business at Latrobe University,
Bendigo, near Melbourne. Her research expertise is in welfare economics and public finance,
health economics, mental health economics, economics and suicide and she has also authored
and co-authored many articles, both conceptual and empirical, on topics in these areas. She has
co-authored, with D.P. Doessel, Economics and Mental Health Care: Industry, Government and
Community Issues (2001). Ruth F.G. Williams is the corresponding author and can be contacted
at: ruth.williams@latrobe.edu.au
D.P. Doessel is a Research Fellow at the Australian Institute for Suicide Research and
Prevention, at Griffith University in Brisbane. His research expertise is in welfare economics and
public finance, health economics, mental health economics, economics and suicide and he has
authored and co-authored books, and a large number of articles, both conceptual and empirical,
on topics in these areas. He has co-authored, with Ruth F.G. Williams, Economics and
Mental Health Care: Industry, Government and Community Issues (2001).

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