seems that the Pareto criterion may have been implicit in economists analyses all the time. But if this was the case, the qualitative arguments for and against various market structures, as compared with the quantita- tive arguments for improving the workings of extant institutions,are without a logical foundation. This is partly because of a nirvana approach to the problem, i.e. comparing the actual operation of an existing system with the hypothetical operation of an ideal system(see Demsetz [14]) but also partly because of a failure by some commentators to recognize that organizational reforms cannot abolish economic problems, though they may change their form I. The characteristics of health care There can be no doubt that health care is not the same thing as other economic goods. It has, moreover, some intriguing characteristics which appear to make for conceptual difficulties in defining the nature of an optimal allocation. Some are shared with education, another good requently provided publicly, for example the direct involvement of the onsumer in the production process and the difficulty of separating or onsumption and investment elements and the very substantial cost that nay fall on individuals giving rise to major distributional problems Others, however, are probably unique in the extent to which they apply to health care compared with other goods or services. The purpose in this is to these for the evidence they provide for public or private provision of health care. I Consumer rationality Welfare economics makes two crucial assumptions regarding consumer rationality. The first is the normative judgement that the individual's own interpretation of his own welfare is the one that counts. The second is the non-normative(but also untestable) assumption that choices reveal preferences. Our purpose is neither to defend nor criticize these assumptions but to discover whether health care characteristics conflict with them Three arguments concerning rationality have been put forward which are alleged impediments to the optimization of welfare in open markets (a) many consumers, though sick, do not desire treatment and may even be ignorant of their sickness (b)the mentally sick fit oddly into a'consumers'sovereignty'model (c)patients requiring emergency treatment are frequently not in a sition to reveal their preferences culiar characteristics of health care are to be found in Arrow [1]. d Mushkin [35] among others. Boulding [4] provides an interesting. iscugsion of the need for care. uced with permission of the coReproduced with permission of the copyright owner. Further reproduction prohibited without permission