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INTRODUCTION In this chapter we begin a different level of inquiry. In part II we focused on the actual allocation of resources devoted to medical care. We were interested in explaining only the various allocations that might occur in different circumstances. We did not concern ourselves with whether any particular alloca¬tion was "good" or "acceptable" or "equitable," to mention only a few of the terms we might use to label an allocation. In this chapter we begin the task of evaluating alternative possible allocations of resources. This task lead us to such questions as whether totally free care can be judged "better" than the provision of medical care in a simple market. Or whether and in what sense a regulated system is preferable to an unregulated one. Many of these questions, it should be pointed out, are policy issues. Indeed, evaluative analysis forms the cornerstone of policy analysis, since the ultimate goal of policy is to bring about improvements in the use of resources. Before undertaking evaluative analysis, we must lay the ground rules for conducting an evaluation. That is the mission of this chapter. In Section 12.2, the importance of having a recognizable and unvarying standard for gauging alternative allocations is discussed. The values that individual persons place on specific services can be used as the basis of a social evaluation. One procedure for building a social evaluation is discussed in Section 12.3. The standard that results from this procedure, which is used frequently by economists, is referred to as an efficiency criterion. Such a yardstick takes individuals' starting situations as given and there¬fore bypasses questions relating to equity and need as determined by clinical criteria.. The application of efficiency criteria to evaluate the performance of the health insurance market is discussed in Section 12.4, and policy goals emanating from this efficiency analysis are presented in Section 12.5. The relevance of the efficiency criteria as the sole benchmark of resource allocation has been questioned by many observers. An alternative approach, called extra-welfarism, is presented in Section 12.6. Finally, alternative measures of equity are considered in Section 12.7.